<PAGE>
ANNUAL REPORT
December 31, 1998
SAFECO MUTUAL FUNDS
STOCK FUNDS
NO-LOAD CLASS
---------
<TABLE>
<S> <C>
Growth Fund .............................................................. 2
Equity Fund .............................................................. 9
Income Fund ............................................................. 14
Northwest Fund .......................................................... 20
International Fund ...................................................... 25
Balanced Fund ........................................................... 31
Small Company Fund ...................................................... 37
U.S. Value Fund ......................................................... 41
</TABLE>
[SAFECO MUTUAL FUNDS LOGO]
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO GROWTH FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Whether SAFECO Growth Fund led or lagged in the latest quarter and year
depends on how you look at it. The Fund, which is about 65% small stocks,
underperformed the average growth fund, but outperformed the small stock group.
The Fund returned 19.54% for the quarter and 4.37% for the year. The average
small-cap fund returned 19.12% and -0.33% for the quarter and year, according to
Lipper, Inc. The average growth fund, which favors larger, more expensive issues
than we do, returned 22.61% for the quarter and 22.86% for the year.
[PHOTO OF THOMAS M. MAGUIRE]
A comparison of the S&P 500 (a proxy for larger stocks) and the Russell 2000
(a small cap index) shows how differently the large and small cap categories
performed. For 1998, the small cap indicator was down 3.45% while, the S&P 500
gained 28.58%. Growth Fund's performance diverges from both indicators because
its holdings are not selected to match either index,
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
<S> <C>
1 Year 4.37%
5 Year 19.00%
10 Year 16.64%
</TABLE>
<TABLE>
<CAPTION>
GROWTH FUND S&P 500 INDEX
<S> <C> <C>
12/31/88 $10,000 $10,000
01/31/89 $10,279 $10,732
02/28/89 $10,213 $10,465
03/31/89 $10,538 $10,709
04/30/89 $10,967 $11,264
05/31/89 $11,429 $11,721
06/30/89 $11,211 $11,654
07/31/89 $11,710 $12,706
08/31/89 $12,060 $12,955
09/30/89 $12,307 $12,902
10/31/89 $11,843 $12,603
11/30/89 $11,807 $12,860
12/31/89 $11,919 $13,168
01/31/90 $10,764 $12,285
02/28/90 $11,058 $12,443
03/31/90 $11,725 $12,773
04/30/90 $11,775 $12,454
05/31/90 $12,981 $13,668
06/30/90 $13,262 $13,575
07/31/90 $12,787 $13,532
08/31/90 $10,581 $12,308
09/30/90 $9,395 $11,709
10/31/90 $8,763 $11,659
11/30/90 $9,411 $12,412
12/31/90 $10,136 $12,758
01/31/91 $11,148 $13,314
02/28/91 $12,684 $14,266
03/31/91 $13,304 $14,611
04/30/91 $13,946 $14,647
05/31/91 $14,866 $15,279
06/30/91 $13,980 $14,579
07/31/91 $15,288 $15,259
08/31/91 $15,896 $15,621
09/30/91 $15,992 $15,360
10/31/91 $16,473 $15,565
11/30/91 $15,083 $14,938
12/31/91 $16,485 $16,647
01/31/92 $17,691 $16,337
02/28/92 $17,565 $16,550
03/31/92 $16,260 $16,227
04/30/92 $15,251 $16,704
05/31/92 $14,873 $16,786
06/30/92 $13,730 $16,536
07/31/92 $14,305 $17,212
08/31/92 $13,495 $16,859
09/30/92 $13,141 $17,058
10/31/92 $13,695 $17,117
11/30/92 $15,424 $17,698
12/31/92 $15,979 $17,915
01/31/93 $16,646 $18,065
02/28/93 $15,537 $18,311
03/31/93 $16,148 $18,697
04/30/93 $15,151 $18,245
05/31/93 $15,932 $18,732
06/30/93 $16,430 $18,787
07/31/93 $16,373 $18,711
08/31/93 $17,426 $19,419
09/30/93 $18,190 $19,270
10/31/93 $18,655 $19,669
11/30/93 $17,868 $19,482
12/31/93 $19,524 $19,718
01/31/94 $20,576 $20,388
02/28/94 $19,593 $19,836
03/31/94 $18,609 $18,973
04/30/94 $19,105 $19,216
05/31/94 $19,281 $19,529
06/30/94 $17,850 $19,051
07/31/94 $18,249 $19,676
08/31/94 $19,388 $20,480
09/30/94 $18,897 $19,981
10/31/94 $19,168 $20,428
11/30/94 $18,646 $19,685
12/31/94 $19,207 $19,976
01/31/95 $18,912 $20,493
02/28/95 $19,952 $21,290
03/31/95 $19,875 $21,918
04/30/95 $19,973 $22,563
05/31/95 $20,772 $23,479
06/30/95 $22,030 $24,024
07/31/95 $22,808 $24,819
08/31/95 $22,731 $24,881
09/30/95 $23,418 $25,931
10/31/95 $23,315 $25,837
11/30/95 $23,552 $26,969
12/31/95 $24,222 $27,490
01/31/96 $25,118 $28,424
02/28/96 $26,060 $28,689
03/31/96 $25,662 $28,964
04/30/96 $26,755 $29,391
05/31/96 $27,891 $30,147
06/30/96 $26,679 $30,262
07/31/96 $24,048 $28,926
08/31/96 $25,483 $29,537
09/30/96 $26,735 $31,198
10/31/96 $27,306 $32,058
11/30/96 $28,362 $34,479
12/31/96 $29,769 $33,796
01/31/97 $32,330 $35,905
2/28/97 $31,470 $36,188
03/31/97 $30,365 $34,705
04/30/97 $28,961 $36,773
05/31/97 $33,347 $39,009
06/30/97 $36,119 $40,756
07/31/97 $38,224 $43,999
08/31/97 $39,592 $41,536
09/30/97 $42,784 $43,810
10/30/97 $41,995 $42,349
11/30/97 $43,819 $44,308
12/31/97 $44,642 $45,068
01/31/98 $45,179 $45,566
02/28/98 $49,732 $48,850
03/31/98 $52,795 $51,350
04/30/98 $54,844 $51,866
05/31/98 $52,278 $50,976
06/30/98 $52,238 $53,046
07/31/98 $49,614 $52,482
08/31/98 $37,563 $44,902
09/30/98 $38,975 $47,779
10/31/98 $42,057 $51,662
11/30/98 $44,205 $54,792
12/31/98 $46,591 $57,947
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical investment into a relevant market index. The index is
unmanaged. Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 2 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
but for value and appreciation potential.
Broadcasting remains our largest sector. I bought more Chancellor when it
declined on fears that recession would lower advertising revenue. In reality,
radio is benefiting by a strong U.S. economy and gaining market share from other
media.
When Conseco (Insurance) fell during the third quarter, insiders recognized
the value and snatched up shares. I think the market soon will too. Conseco is
positioned to increase profitability and pick up market share.
NCO Group climbed into our top ten. It's the second largest, and only public,
bad-debt collector in the nation. This is partly a rough-times play. Our economy
is increasingly fueled by debt, and that makes bill collection a growth
industry.
All told, health care counts for 14.3% of net assets. I like the defensive
nature and demographic positives of health care. Beckman Coulter, new to our top
ten, supplies capital equipment to the medical industry.
With 70% of its sales in Japan, Nu Skin Enterprises was
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Chancellor Media Corp. ........................................... 11.3%
(Radio Stations)
Conseco, Inc. ...................................................... 8.3
(Financial Services Company)
NCO Group, Inc. .................................................... 4.5
(Financial Services)
Corrections Corp. of America ........................................ 3.9
(Correctional Institution Management)
Emmis Communications Corp. (Class A) ................................ 3.7
(Radio Stations)
Family Golf Centers, Inc. .......................................... 3.4
(Golf Recreation Centers)
Beckman Coulter, Inc. .............................................. 3.0
(Medical Instruments Manufacturer)
MICROS Systems, Inc. ............................................... 2.7
(Specialty Software Company)
Dura Pharmaceuticals, Inc. ......................................... 2.7
(Pharmaceuticals)
United Stationers, Inc. ............................................ 2.5
(Office Products Distribution)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES COST
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Conseco, Inc. ..................................................... $47,184
Chancellor Media Corp. ............................................. 34,496
Stage Stores, Inc. ................................................. 32,313
Mail-Well, Inc. .................................................... 26,633
Sirrom Capital Corp. ............................................... 26,240
<CAPTION>
TOP FIVE SALES PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
*Philip Morris Cos., Inc. ......................................... $87,034
*Avon Products, Inc. ............................................... 41,068
*American Home Products Corp. ...................................... 29,900
*American Stores Co. ............................................... 29,398
*Kimberly-Clark Corp. .............................................. 25,789
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Broadcasting (Television, Radio & Cable) ............................ 16%
Services (Commercial & Consumer) ...................................... 8
Insurance (Life-Health) ............................................... 8
Health Care (Medical Products & Supplies) ............................. 5
Real Estate Investment Trust .......................................... 5
- -------------------------------------------------------------------------
* Security sold, no longer in portfolio.
</TABLE>
- 3 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE GROWTH FUND MANAGER
hurt by a weak yen. This company direct-markets personal products outside of the
U.S. and has great potential in emerging economies where multi-level marketing
is more accepted.
Family Golf Centers was punished for buying ice rinks. While this will lessen
its seasonality, the company now has to prove they can turn around ice rinks as
well as they have driving ranges. I think they can.
Except for radio, all the stocks we've discussed are selling at a discount in
a market where large growth stocks are selling at tremendous premiums. As
earnings slow, I predict investors will become increasingly price conscious and
less likely to pay top dollar.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS AS A PERCENT OF NET ASSETS
<S> <C>
COMMON STOCKS
(1) Large ($4 Bil. and above) 21%
(2) Medium ($1 Bil. - $4 Bil.) 15%
(3) Small (Less than $1 Bil.) 65%
(4) Corporate Bonds 0%
(5) Cash & Other -1%
</TABLE>
Because I look for a share price that is a fraction of a company's growth
rate, most of the stocks we own are already marked down. If they outperform even
a little--especially the small ones--the very investors who abandoned them may
rush back in. And, theoretically, price will follow demand.
The primary reason the Growth Fund has historically held smaller company
stocks is that they offer better growth prospects at better valuations than
bigger company stocks. I believe money moves to growth.
Thomas M. Maguire
- -------------------------------
After completing his M.B.A. at the University of Washington, Thomas M. 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.
- 4 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO GROWTH FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMON STOCKS - 101.1%
AIR FREIGHT - 0.2%
641,800 *+Dynamex, Inc. ................................... $ 2,527
AUTO PARTS & EQUIPMENT - 0.1%
607,000 *+Precision Auto Care, Inc. ......................... 1,366
BANKS (MAJOR REGIONAL) - 0.7%
405,405 Provident Bankshares Corp. ......................... 10,084
BIOTECHNOLOGY - 0.3%
396,700 *CryoLife, Inc. ..................................... 4,711
BROADCASTING (TELEVISION, RADIO & CABLE) - 15.6%
3,405,749 *Chancellor Media Corp. ........................... 163,050
1,241,500 *+Emmis Communications Corp. (Class A) .............. 53,850
128,400 *Jacor Communications, Inc. ......................... 8,266
BUILDING MATERIALS - 0.2%
467,700 *Hospitality Worldwide Services ...................... 2,339
CHEMICALS (SPECIALTY) - 0.5%
709,800 *+TETRA Technologies, Inc. .......................... 7,763
COMMUNICATIONS EQUIPMENT - 2.0%
208,600 Scientific-Atlanta, Inc. ............................ 4,759
1,110,549 *World Access, Inc. ................................ 23,738
COMPUTERS (HARDWARE) - 4.0%
146,200 *Equitrac Corp. ..................................... 2,778
180,000 *Jabil Circuit, Inc. ............................... 13,433
1,202,028 *+MICROS Systems, Inc. ............................. 39,517
128,000 *Optimal Robotics Corp. ............................. 1,792
COMPUTERS (PERIPHERALS) - 1.2%
822,500 *Quantum Corp. ..................................... 17,478
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMPUTERS (SOFTWARE & SERVICES) - 4.5%
876,100 *Aspen Technology, Inc. .......................... $ 12,703
481,500 *Cambridge Technology Partners, Inc. ............... 10,653
1,617,700 *+Discreet Logic, Inc. ............................. 30,534
622,500 *+Phoenix International Ltd., Inc. .................. 9,182
295,400 *TRO Learning, Inc. ................................. 2,363
CONSUMER (FINANCE) - 2.2%
489,400 +Creditrust Corp. .................................. 12,480
574,135 Doral Financial Corp. .............................. 12,703
817,000 *Towne Services, Inc. ............................... 5,719
118,000 *+Waterside Capital Corp. ........................... 1,003
CONSUMER (JEWELRY, NOVELTIES & GIFTS) - 0.6%
250,500 *Action Performance Cos., Inc. ...................... 8,861
DISTRIBUTORS (FOOD & HEALTH) - 2.8%
1,504,900 *Nu Skin Enterprises, Inc. (Class A) ................ 35,553
728,200 Weider Nutrition International, Inc. ................ 4,642
DRUGS & HOSPITAL SUPPLY - 0.5%
335,500 *Zonagen, Inc. ...................................... 6,416
ELECTRICAL EQUIPMENT - 1.4%
368,200 *Kent Electronics Corp. ............................. 4,695
398,800 *PCD, Inc. .......................................... 5,184
182,500 *SCI Systems, Inc. ................................. 10,539
ENGINEERING & CONSTRUCTION - 0.6%
360,400 *+American Buildings Co. ............................ 8,830
ENTERTAINMENT - 2.4%
376,400 *Championship Auto Racing Teams, Inc. .............. 11,151
433,600 *SFX Entertainment, Inc. (Class A) .................. 23,794
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 5 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO GROWTH FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
FINANCIAL (DIVERSIFIED) - 1.7%
483,600 *+BNC Mortgage, Inc. .............................. $ 2,539
3,722,900 +Sirrom Capital Corp. .............................. 18,382
48,000 *TeleBanc Financial Corp. ........................... 1,632
444,700 *United Panam Financial Corp. ....................... 1,862
HEALTH CARE (DIVERSIFIED) - 1.0%
346,500 *Anesta Corp. ....................................... 9,226
320,000 *Synaptic Pharmaceutical Corp. ...................... 4,800
HEALTH CARE (DRUGS-GENERAL) - 2.8%
2,546,300 *+Dura Pharmaceuticals, Inc. ....................... 38,672
609,000 *+Nastech Pharmaceutical Co., Inc. .................. 2,360
HEALTH CARE (DRUGS-MAJOR PHARMACEUTICALS) - 3.1%
162,300 *Andrx Corp. ........................................ 8,318
142,800 *PharmaPrint, Inc. .................................. 1,874
542,750 *Serologicals Corp. ................................ 16,283
255,000 *SuperGen, Inc. ..................................... 2,359
407,100 Teva Pharmaceutical Industries, Ltd. (ADR) .......... 16,564
HEALTH CARE (LONG TERM CARE) - 1.0%
955,400 *HEALTHSOUTH Corp. ................................. 14,749
HEALTH CARE (MANAGED CARE) - 0.3%
344,100 +First Commonwealth, Inc. ........................... 4,559
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) - 5.3%
795,500 Beckman Coulter, Inc. .............................. 43,156
105,100 *Datascope Corp. .................................... 2,417
295,200 *EDAP TMS S.A. (ADR) ................................... 387
413,900 *Haemonetics Corp. .................................. 9,416
514,450 *+Lifeline Systems, Inc. ........................... 12,861
886,000 *+PolyMedica Industries, Inc. ........................ 8,195
HEALTH CARE (SPECIALIZED SERVICES) - 0.8%
282,300 *American Healthcorp, Inc. . 2,770
1,121,300 *+Prime Medical Services, Inc. ...................... 8,200
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
HOMEBUILDING - 0.1%
57,187 *American Homestar Corp. .......................... $ 858
HOUSEHOLD FURNITURE & APPLIANCES - 0.3%
585,900 *International Comfort Products Corp. ............... 4,687
HOUSEHOLD PRODUCTS (NON-DURABLES) - 0.1%
195,000 *U.S. Home & Garden, Inc. ............................. 975
HOUSEWARES - 0.2%
293,200 *Home Products International, Inc. .................. 2,914
INSURANCE (LIFE-HEALTH) - 8.3%
3,931,029 Conseco, Inc. ..................................... 120,142
LEISURE TIME (PRODUCTS) - 3.6%
391,000 *+American Coin Merchandising, Inc. ................. 2,297
2,511,775 *+Family Golf Centers, Inc. ........................ 49,608
LODGING (HOTELS) - 1.3%
388,400 *ResortQuest International, Inc. .................... 5,680
1,528,600 *+Suburban Lodges of America, Inc. ................. 12,515
MACHINERY (DIVERSIFIED) - 0.4%
793,450 Chart Industries, Inc. .............................. 6,050
MANUFACTURING (DIVERSIFIED) - 1.8%
439,100 *Nortek, Inc. ...................................... 12,130
341,850 *+Recovery Engineering, Inc. ......................... 2,265
246,000 *SurModics, Inc. .................................... 3,813
386,300 U.S. Industries, Inc. ............................... 7,195
MANUFACTURING (SPECIALIZED) - 0.3%
314,000 *+Teardrop Golf Co. ................................. 1,570
190,600 *Zomax Optical Media, Inc. .......................... 3,097
NATURAL GAS - 0.0%
75,500 Virginia Gas Co. ...................................... 255
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 6 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO GROWTH FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
OFFICE EQUIPMENT & SUPPLIES - 2.9%
244,500 *+Open Plan Systems, Inc. .......................... $ 550
698,400 *+TRM Copy Centers Corp. ............................ 5,282
1,404,100 *United Stationers, Inc. ........................... 36,507
PERSONAL CARE - 0.5%
895,000 *+French Fragrances, Inc. ........................... 6,489
REAL ESTATE INVESTMENT TRUST - 4.6%
527,100 CCA Prison Realty Trust ............................. 10,806
3,164,500 *Corrections Corp. of America ....................... 55,774
RESTAURANTS - 1.0%
586,500 *Rainforest Cafe, Inc. .............................. 3,556
464,300 *Rare Hospitality International, Inc. ............... 6,500
493,000 *+Schlotzsky's, Inc. ................................ 4,868
RETAIL (BUILDING SUPPLIES) - 1.3%
569,800 *Eagle Hardware & Garden, Inc. ..................... 18,519
RETAIL (DEPARTMENT STORES) - 0.7%
179,400 *Marks Brothers Jewelers, Inc. ...................... 3,229
266,300 *Rainbow Rentals, Inc. .............................. 2,630
272,500 *Value City Department Stores, Inc. ................. 3,798
RETAIL (FOOD CHAINS) - 0.8%
912,279 *NPC International, Inc. ........................... 11,004
RETAIL (GENERAL MERCHANDISE) - 0.4%
290,000 *Central Garden & Pet Co. ........................... 4,169
264,075 Phillips-Van Heusen Corp. ........................... 1,898
RETAIL (HOME SHOPPING) - 0.5%
754,900 *+Damark International, Inc. ........................ 6,134
RETAIL (SPECIALTY) - 0.9%
229,300 *1-800 Contacts, Inc. ............................... 4,127
354,300 *+Funco, Inc. ....................................... 6,200
153,000 *Travis Boats & Motors, Inc. ......................... 3,137
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
RETAIL (SPECIALTY-APPAREL) - 2.1%
479,500 *+Concepts Direct, Inc. ......................... $ 4,016
542,213 *+Harold's Stores, Inc. ............................. 3,999
2,112,434 *+Stage Stores, Inc. ............................... 19,804
58,700 *Wet Seal, Inc. (Class A) ............................ 1,772
SERVICES (ADVERTISING-MARKETING) - 0.2%
939,900 *APAC Teleservices, Inc. ............................ 3,554
SERVICES (COMMERCIAL & CONSUMER) - 8.4%
834,400 *Bluegreen Corp. .................................... 6,310
680,200 *Compass International Services Corp. ............... 7,227
383,600 *FirstService Corp. ................................. 4,579
839,900 *+IntelliQuest Information Group, Inc. .............. 5,669
1,455,700 *+NCO Group, Inc. .................................. 65,507
107,900 *Rent-Way, Inc. ..................................... 2,623
741,200 *Renters Choice, Inc. .............................. 23,533
280,000 SunSource, Inc. ..................................... 5,268
SERVICES (DATA PROCESSING) - 0.2%
378,100 *Vanstar Corp. ...................................... 3,497
SERVICES (EMPLOYMENT) - 0.6%
194,000 *Alternative Resources Corp. ........................ 2,061
898,600 *+Hall, Kinion & Associates, Inc. ................... 6,290
SERVICES (SECURITY) - 0.1%
38,466 *Kroll-O'Gara Company ................................ 1,517
SPECIALTY PRINTING - 2.0%
2,330,400 *Mail-Well, Inc. ................................... 26,654
TELECOMMUNICATIONS (CELLULAR/WIRELESS) - 0.9%
1,901,600 *CellStar Corp. .................................... 12,955
TELEPHONE - 0.8%
676,000 *+Innotrac Corp. ................................... 12,252
TRUCKS & PARTS - 0.2%
38,900 *SPX Corp. .......................................... 2,606
-------
TOTAL COMMON STOCKS ............................................... 1,458,958
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 7 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO GROWTH FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
CORPORATE BONDS - 0.3%
LEISURE TIME (PRODUCTS) - 0.3%
$4,700,000 Family Golf Centers, Inc.
5.75%, due 10/15/04 .............................. $ 4,342
-------
TOTAL CORPORATE BONDS ................................................. 4,342
-------
TOTAL INVESTMENTS - 101.4% ........................................ 1,463,300
Liabilities, less Other Assets ..................................... (19,794)
-------
NET ASSETS ....................................................... $1,443,506
-------
-------
- -----------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
+ Affiliated issuer as defined by the Investment Company Act of 1940 (the Fund
controls 5% or more of the outstanding voting shares of the company).
SEE NOTES TO FINANCIAL STATEMENTS
- 8 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO EQUITY FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SAFECO Equity Fund beat its peer group for the year and quarter ended
December 31, 1998. The Fund was up 24.93% for the year. That put us in the top
20% of our growth and income peers, whose average return was 15.61% according to
Lipper, Inc. For the fourth quarter, the Fund returned 18.72% compared to 17.79%
for the peer group.
We again benefited as larger capitalization stocks outperformed smaller
capitalization stocks. The Fund, on average, owns a larger percentage of big
companies than the peer group. Our focus on size, quality and predictability
kept us ahead of the average growth and income fund.
[PHOTO OF RICH MEAGLEY]
Regarding the S&P 500, the Fund was ahead of the broad market index at the
end of November, but had a poor December as technology issues, which we own less
of than the index, surged. The S&P returned 28.58% for the year. Most of it,
21.28%, came during the fourth quarter.
We ended 1998 holding 47 companies. Turnover in the portfolio remained low
and steady, at 32.94%.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
<S> <C>
1 Year 24.93%
5 Year 21.71%
10 Year 19.76%
</TABLE>
<TABLE>
<CAPTION>
EQUITY FUND S&P 500 INDEX
<S> <C> <C>
12/31/88 $10,000 $10,000
01/31/89 $10,678 $10,732
02/28/89 $10,503 $10,465
03/31/89 $10,691 $10,709
04/30/89 $11,348 $11,264
05/31/89 $11,803 $11,721
06/30/89 $11,766 $11,654
07/31/89 $12,814 $12,706
08/31/89 $13,019 $12,955
09/30/89 $12,974 $12,902
10/31/89 $12,998 $12,603
11/30/89 $13,088 $12,860
12/31/89 $13,579 $13,168
01/31/90 $12,452 $12,285
02/28/90 $12,569 $12,443
03/31/90 $13,035 $12,773
04/30/90 $12,658 $12,454
05/31/90 $13,881 $13,668
06/30/90 $13,858 $13,575
07/31/90 $13,611 $13,532
08/31/90 $12,173 $12,308
09/30/90 $11,581 $11,709
10/31/90 $11,334 $11,659
11/30/90 $11,951 $12,412
12/31/90 $12,416 $12,758
01/31/91 $13,052 $13,314
02/28/91 $13,828 $14,266
03/31/91 $14,218 $14,611
04/30/91 $14,509 $14,647
05/31/91 $15,093 $15,279
06/30/91 $14,123 $14,579
07/31/91 $15,070 $15,259
08/31/91 $15,307 $15,621
09/30/91 $15,100 $15,360
10/31/91 $15,347 $15,565
11/30/91 $14,387 $14,938
12/31/91 $15,881 $16,647
01/31/92 $16,825 $16,337
02/28/92 $17,111 $16,550
03/31/92 $16,341 $16,227
04/30/92 $16,477 $16,704
05/31/92 $16,326 $16,786
06/30/92 $15,147 $16,536
07/31/92 $15,766 $17,212
08/31/92 $15,118 $16,859
09/30/92 $15,161 $17,058
10/31/92 $15,893 $17,117
11/30/92 $16,943 $17,698
12/31/92 $17,352 $17,915
01/31/93 $17,927 $18,065
02/28/93 $17,943 $18,311
03/31/93 $18,907 $18,697
04/30/93 $18,475 $18,245
05/31/93 $19,995 $18,732
06/30/93 $20,077 $18,787
07/31/93 $19,804 $18,711
08/31/93 $20,913 $19,419
09/30/93 $21,495 $19,270
10/31/93 $22,060 $19,669
11/30/93 $22,181 $19,482
12/31/93 $22,716 $19,718
01/31/94 $24,077 $20,388
02/28/94 $23,474 $19,836
03/31/94 $22,573 $18,973
04/30/94 $23,299 $19,216
05/31/94 $23,973 $19,529
06/30/94 $23,110 $19,051
07/31/94 $23,701 $19,676
08/31/94 $25,144 $20,480
09/30/94 $25,044 $19,981
10/31/94 $25,513 $20,428
11/30/94 $25,009 $19,685
12/31/94 $24,972 $19,976
01/31/95 $25,155 $20,493
02/28/95 $25,812 $21,290
03/31/95 $26,022 $21,918
04/30/95 $26,719 $22,563
05/31/95 $27,399 $23,479
06/30/95 $28,078 $24,024
07/31/95 $28,522 $24,819
08/31/95 $29,316 $24,881
09/30/95 $30,451 $25,931
10/31/95 $30,072 $25,837
11/30/95 $31,047 $26,969
12/31/95 $31,280 $27,490
01/31/96 $32,116 $28,424
02/28/96 $32,402 $28,689
03/31/96 $32,735 $28,964
04/30/96 $33,432 $29,391
05/31/96 $34,210 $30,147
06/30/96 $34,843 $30,262
07/31/96 $33,506 $28,926
08/31/96 $33,855 $29,537
09/30/96 $35,943 $31,198
10/31/96 $37,099 $32,058
11/30/96 $39,889 $34,479
12/31/96 $39,102 $33,796
01/31/97 $41,364 $35,905
02/28/97 $41,529 $36,188
03/31/97 $39,863 $34,705
04/30/97 $41,021 $36,773
05/31/97 $43,738 $39,009
06/30/97 $45,524 $40,756
07/31/97 $48,606 $43,999
08/31/97 $46,093 $41,536
09/30/97 $47,755 $43,810
10/30/97 $46,233 $42,349
11/30/97 $47,731 $44,308
12/31/97 $48,568 $45,068
01/31/98 $49,313 $45,566
02/28/98 $53,215 $48,850
03/31/98 $55,000 $51,350
04/30/98 $55,100 $51,866
05/31/98 $54,079 $50,976
06/30/98 $55,461 $53,046
07/31/98 $54,812 $52,482
08/31/98 $47,720 $44,902
09/30/98 $51,111 $47,779
10/31/98 $55,643 $51,662
11/30/98 $59,174 $54,792
12/31/98 $60,677 $57,947
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical investment into a relevant market index. The index is
unmanaged. Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 9 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE EQUITY FUND MANAGER
In the last six months, most of the changes in the portfolio have come from
market action, partial sales and additions. During the year I added only seven
new names to our portfolio, and I deleted ten. The changes were made to increase
the overall quality and earnings predictability of the companies in the Fund.
Alphabetically our new names are Abbott Laboratories, Bestfoods, CitiGroup,
Procter & Gamble, Schlumberger, U.S. Bancorp, and Washington Mutual. The names
we no longer own are: Boeing, Columbia/HCA Healthcare, Echlin, Electronic Data
Systems, First Data, GTE, Houston Industries, Oracle, Pacificare Health Systems
and SmithKline Beecham.
Only two of those sales came in the last half of the year. I eliminated
Boeing and GTE during the fourth quarter. Boeing was sold because the earnings
prospects for the next several years have deteriorated greatly. In October of
1997, I believed Boeing would overcome its production inefficiencies and the
"Asia effect". When it became clear this wasn't going to happen, I abandoned the
position.
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Chase Manhattan Corp. ............................................. 3.2%
(Bank)
Microsoft Corp. .................................................... 3.2
(Personal Computer Software)
Kimberly-Clark Corp. ............................................... 3.1
(Manufacturing & Marketing Personal Care Products)
Intel Corp. ........................................................ 3.1
(Computer Component Manufacturer)
Johnson & Johnson ................................................... 3.0
(Health Care Products)
Federal National Mortgage Association ............................... 3.0
(Mortgage Loan Banker)
Abbott Laboratories ................................................. 2.9
(Health Care Products)
General Electric Co. ............................................... 2.9
(Electrical Equipment)
Washington Mutual, Inc. ............................................ 2.6
(Savings & Loan)
Merck & Co., Inc. .................................................. 2.6
(Health Care Products)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(July to Dec.) COST (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Washington Mutual, Inc. ........................................... $33,420
Bestfoods ........................................................... 21,537
Dover Corp. ........................................................ 20,382
American International Group, Inc. ................................. 17,274
May Department Stores Co. .......................................... 16,512
<CAPTION>
TOP FIVE SALES PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
American Stores Co. ............................................... $43,558
*GTE Corp. ......................................................... 36,370
*Boeing Co. ........................................................ 31,134
Hartford Financial Services Group, Inc. ............................ 30,866
Texaco, Inc. ....................................................... 24,085
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
Health Care (Diversified) .............................................. 11%
Financial (Diversified) .................................................. 6
Manufacturing (Diversified) .............................................. 5
Computers (Hardware) ..................................................... 5
Household Products (Non-Durables) ........................................ 5
- ----------------------------------------------------------------------------
* Security sold, no longer in portfolio.
</TABLE>
- 10 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
GTE was eliminated because the Fund also holds Bell Atlantic, the company
acquiring GTE. Owning both positions wasn't prudent. I reduced our position
sizes in Anheuser-Busch and Burlington Northern when the stock prices reached my
near-term targets.
One new position was added in the last six months: Bestfoods. The company has
reasonable growth prospects and was selling at 22 times estimated 1999's
earnings per share while the S&P 500 sells at 24-25 times.
In keeping with what I've done in the past, I added to existing holdings when
I liked their price and sold parts of positions when they were on the high side.
While I added to 18 names during the fourth quarter, two saw their position
sizes increase materially. American International Group and May Department
Stores were trading at 21 times and 16 times estimated 1999 earnings per share,
respectively, when I added to them.
In the third quarter, I added substantially to Washington Mutual when I
thought it was at a reasonable price/earnings ratio and I sold down Hartford
Financial Services as it had gained steadily to become the second largest
holding in the Fund. I felt, given the Hartford's valuation level and my overall
exposure to financial stocks, that it was prudent to substantially reduce the
position size. Diversified Financial and Banking and Finance companies comprised
9.4% of net assets at year-end.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS AS A PERCENT OF NET ASSETS
<S> <C>
COMMON STOCKS
(1) Large ($4 Bil. and above.) 94%
(2) Medium ($1 Bil. - $4 Bil.) 1%
(3) Cash and Other 5%
</TABLE>
We began our walk to quality almost two years ago and so far, we have been
rewarded. Rather than move too quickly and stumble, I intend to keep the same
path and the same pace. It looks, to me, like the road ahead could be rough.
Richard Meagley
- -------------------------------
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.
- 11 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO EQUITY FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMON STOCKS - 94.8%
AEROSPACE/DEFENSE - 2.1%
520,000 Lockheed Martin Corp. ............................. $44,070
BANKING & FINANCE - 3.9%
625,000 BankAmerica Corp. .................................. 37,578
875,000 Citigroup, Inc. .................................... 43,313
BANKS (MAJOR REGIONAL) - 1.1%
652,200 U.S. Bancorp ........................................ 23,153
BANKS (MONEY CENTER) - 3.2%
1,000,000 Chase Manhattan Corp. .............................. 68,062
BEVERAGES (ALCOHOLIC) - 1.6%
500,000 Anheuser-Busch Co., Inc. ........................... 32,813
BEVERAGES (NON-ALCOHOLIC) - 1.7%
875,000 PepsiCo, Inc. ...................................... 35,820
CHEMICALS - 3.3%
625,000 Du Pont (E.I.) de Nemours & Co. .................... 33,164
1,000,000 Praxair, Inc. ...................................... 35,250
COMMUNICATIONS EQUIPMENT - 1.3%
450,000 Motorola, Inc. ..................................... 27,478
COMPUTERS (HARDWARE) - 5.0%
775,000 Hewlett-Packard Co. ................................ 52,942
275,000 International Business Machines Corp. .............. 50,806
COMPUTERS (NETWORKING) - 1.3%
600,000 *3Com Corp. ........................................ 26,888
COMPUTERS (SOFTWARE & SERVICES) - 3.2%
490,000 *Microsoft Corp. ................................... 67,957
ELECTRICAL EQUIPMENT - 2.9%
600,000 General Electric Co. ............................... 61,238
ELECTRONICS (SEMICONDUCTORS) - 3.1%
550,000 Intel Corp. ........................................ 65,209
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
ENTERTAINMENT - 1.6%
1,095,000 Walt Disney Co. ................................... $32,850
FINANCIAL (DIVERSIFIED) - 5.5%
800,000 Federal Home Loan Mortgage Corp. ................... 51,550
850,000 Federal National Mortgage Association ............... 62,900
FOODS - 1.0%
400,000 Bestfoods ........................................... 21,300
HEALTH CARE (DIVERSIFIED) - 10.9%
1,250,000 Abbott Laboratories ................................. 61,250
950,000 American Home Products Corp. ....................... 53,497
375,000 Bristol-Myers Squibb Co. ........................... 50,180
750,000 Johnson & Johnson ................................... 62,906
HEALTH CARE (DRUGS-MAJOR PHARMACEUTICALS) - 2.6%
365,000 Merck & Co., Inc. .................................. 53,906
HOUSEHOLD PRODUCTS (NON-DURABLES) - 4.9%
1,200,000 Kimberly-Clark Corp. ............................... 65,400
415,000 Procter & Gamble Co. ............................... 37,895
INSURANCE (MULTI-LINE) - 3.2%
475,000 American International Group, Inc. ................. 45,897
400,000 Hartford Financial Services Group, Inc. ............ 21,950
MANUFACTURING (DIVERSIFIED) - 5.1%
1,200,000 AlliedSignal, Inc. ................................. 53,175
1,450,000 Dover Corp. ........................................ 53,106
OIL (DOMESTIC INTEGRATED) - 2.2%
535,000 Mobil Corp. ........................................ 46,612
OIL (INTERNATIONAL INTEGRATED) - 4.2%
500,000 Exxon Corp. ........................................ 36,563
725,000 Royal Dutch Petroleum Co. (ADR) ..................... 34,709
300,000 Texaco, Inc. ....................................... 15,863
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 12 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO EQUITY FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
OIL & GAS (DRILLING & EQUIPMENT) - 0.9%
400,000 Schlumberger Ltd. ................................. $18,450
PAPER & FOREST PRODUCTS - 1.3%
800,000 Willamette Industries, Inc. ........................ 26,800
RAILROADS - 1.5%
913,700 Burlington Northern Santa Fe Corp. ................. 30,837
RETAIL (DEPARTMENT STORES) - 1.9%
675,000 May Department Stores Co. .......................... 40,753
RETAIL (FOOD CHAINS) - 2.1%
550,000 Albertson's, Inc. .................................. 35,028
250,000 American Stores Co. ................................. 9,234
RETAIL (GENERAL MERCHANDISE) - 1.7%
435,000 Wal-Mart Stores, Inc. .............................. 35,425
SAVINGS & LOANS - 2.6%
1,425,000 Washington Mutual, Inc. ............................ 54,417
SERVICES (DATA PROCESSING) - 1.1%
300,000 Automatic Data Processing, Inc. .................... 24,056
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
TELECOMMUNICATIONS (LONG DISTANCE) - 2.3%
650,000 AT&T Corp. ..................................... $ 48,913
TELEPHONE - 2.2%
800,000 Bell Atlantic Corp. ................................ 45,450
TOBACCO - 2.3%
890,000 Philip Morris Cos., Inc. ........................... 47,615
-------
TOTAL COMMON STOCKS ............................................... 1,984,228
-------
TEMPORARY INVESTMENTS - 4.5%
COMMERCIAL PAPER:
$94,749,000 Associates First Capital Corporation
5.15%, due 1/04/99 .................................. 94,749
-------
TOTAL TEMPORARY INVESTMENTS .......................................... 94,749
-------
TOTAL INVESTMENTS - 99.3% ......................................... 2,078,977
Other Assets, less Liabilities ....................................... 13,486
-------
NET ASSETS ....................................................... $2,092,463
-------
-------
- -----------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
- 13 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO INCOME FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
After a third quarter so painful that it made for a bad year, SAFECO Income
Fund beat its peer funds in the fourth quarter, 14.55% to 13.35%, Lipper, Inc.'s
average for equity income funds. In spite of the fact the Fund outperformed in
three of four quarters, it underperformed significantly for the full year. For
1998, the Fund returned 6.31%, compared to the peer group's 10.89% and the S&P
500's 28.58%. [PHOTO OF THOMAS RATH]
I view this year's third quarter--and the toll it took on our Fund--as an
anomaly. I had concentrated the Fund on solid businesses with lower-price
earnings ratios. I had avoided Asian exposure and held convertibles to lend
stability in the event of a correction. This conservatism didn't work the way I
planned. Small companies (18 to 20% of assets at the time) grossly
underperformed. Convertibles (about 28% of the portfolio) suffered as spreads to
treasuries widened. Meanwhile our radio stocks behaved as if they were in a
recession and without advertisers.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
<S> <C>
1 Year 6.31%
5 Year 16.53%
10 Year 13.46%
</TABLE>
<TABLE>
<CAPTION>
INCOME FUND S&P 500 INDEX
<S> <C> <C>
12/31/88 $10,000 $10,000
01/31/89 $10,450 $10,732
02/28/89 $10,309 $10,465
03/31/89 $10,494 $10,709
04/30/89 $10,894 $11,264
05/31/89 $11,185 $11,721
06/30/89 $11,234 $11,654
07/31/89 $11,912 $12,706
08/31/89 $12,107 $12,955
09/30/89 $12,011 $12,902
10/31/89 $11,558 $12,603
11/30/89 $11,690 $12,860
12/31/89 $11,922 $13,168
01/31/90 $11,319 $12,285
02/28/90 $11,372 $12,443
03/31/90 $11,457 $12,773
04/30/90 $11,028 $12,454
05/31/90 $11,608 $13,668
06/30/90 $11,562 $13,575
07/31/90 $11,355 $13,532
08/31/90 $10,514 $12,308
09/30/90 $10,082 $11,709
10/31/90 $9,839 $11,659
11/30/90 $10,442 $12,412
12/31/90 $10,640 $12,758
01/31/91 $11,053 $13,314
02/28/91 $11,690 $14,266
03/31/91 $11,867 $14,611
04/30/91 $11,996 $14,647
05/31/91 $12,359 $15,279
06/30/91 $12,048 $14,579
07/31/91 $12,391 $15,259
08/31/91 $12,766 $15,621
09/30/91 $12,746 $15,360
10/31/91 $12,880 $15,565
11/30/91 $12,348 $14,938
12/31/91 $13,114 $16,647
01/31/92 $13,215 $16,337
02/28/92 $13,257 $16,550
03/31/92 $13,129 $16,227
04/30/92 $13,512 $16,704
05/31/92 $13,640 $16,786
06/30/92 $13,690 $16,536
07/31/92 $14,199 $17,212
08/31/92 $14,095 $16,859
09/30/92 $14,245 $17,058
10/31/92 $13,982 $17,117
11/30/92 $14,341 $17,698
12/31/92 $14,618 $17,915
01/31/93 $14,937 $18,065
02/28/93 $15,221 $18,311
03/31/93 $15,736 $18,697
04/30/93 $15,521 $18,245
05/31/93 $15,727 $18,732
06/30/93 $15,808 $18,787
07/31/93 $15,727 $18,711
08/31/93 $16,244 $19,419
09/30/93 $16,289 $19,270
10/31/93 $16,572 $19,669
11/30/93 $16,372 $19,482
12/31/93 $16,453 $19,718
01/31/94 $16,990 $20,388
02/28/94 $16,610 $19,836
03/31/94 $16,031 $18,973
04/30/94 $16,218 $19,216
05/31/94 $16,227 $19,529
06/30/94 $15,989 $19,051
07/31/94 $16,482 $19,676
08/31/94 $17,005 $20,480
09/30/94 $16,774 $19,981
10/31/94 $16,745 $20,428
11/30/94 $16,152 $19,685
12/31/94 $16,272 $19,976
01/31/95 $16,686 $20,493
02/28/95 $17,208 $21,290
03/31/95 $17,696 $21,918
04/30/95 $18,074 $22,563
05/31/95 $18,601 $23,479
06/30/95 $18,832 $24,024
07/31/95 $19,565 $24,819
08/31/95 $19,707 $24,881
09/30/95 $20,303 $25,931
10/31/95 $20,080 $25,837
11/30/95 $20,782 $26,969
12/31/95 $21,213 $27,490
01/31/96 $21,892 $28,424
02/28/96 $21,946 $28,689
03/31/96 $22,206 $28,964
04/30/96 $22,293 $29,391
05/31/96 $23,030 $30,147
06/30/96 $23,319 $30,262
07/31/96 $22,662 $28,926
08/31/96 $23,089 $29,537
09/30/96 $24,157 $31,198
10/31/96 $25,049 $32,058
11/30/96 $26,363 $34,479
12/31/96 $26,303 $33,796
01/31/97 $27,336 $35,905
02/28/97 $27,373 $36,188
03/31/97 $26,368 $34,705
04/30/97 $26,732 $36,773
05/31/97 $28,650 $39,009
06/30/97 $29,831 $40,756
07/31/97 $31,460 $43,999
08/31/97 $30,980 $41,536
09/30/97 $32,362 $43,810
10/30/97 $31,294 $42,349
11/30/97 $32,425 $44,308
12/31/97 $33,255 $45,068
01/31/98 $33,784 $45,566
02/28/98 $35,705 $48,850
03/31/98 $37,183 $51,350
04/30/98 $37,463 $51,866
05/31/98 $36,652 $50,976
06/30/98 $37,412 $53,046
07/31/98 $35,793 $52,482
08/31/98 $30,306 $44,902
09/30/98 $30,865 $47,779
10/31/98 $32,722 $51,662
11/30/98 $34,522 $54,792
12/31/98 $35,355 $57,947
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical investment into a relevant market index. The index is
unmanaged. Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 14 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
We began the fourth quarter holding the same fine companies, and, they came
back to reward us for staying. My investing style, the strong fundamentals of
our companies and the solid underpinnings of the U.S. economy did not change.
The only thing that changed was the markets' psychology.
Technology was very strong and our higher-than-the-average-equity-income-fund
weighting (about 15%) helped us outperform. So did the recovery of radio stocks
and the fact that small stocks and convertibles moved off their lows.
During the fourth quarter I made a concerted effort to realize losses and to
increase the Fund's equity sensitivity. Several convertible security positions
were eliminated (as well as a couple of stocks where the business fundamentals
had become uncertain). Our allocation to convertibles declined from 28% of net
assets to about 23% in the fourth quarter. Family Golf Centers was one of the
convertible positions I sold down and Conseco was one of the equity positions I
increased.
Only two totally new positions were added to the portfolio: PepsiCo, which
was
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Chancellor Media Corp.
7.00% Convertible ................................................ 5.8%
(Radio Stations)
American Home Products Corp. ....................................... 4.0
(Pharmaceuticals)
Merrill Lynch & Co. 7.875%, Cvt. ................................... 3.8
(Financial Management)
CCA Prison Realty Trust ............................................. 3.2
(Correctional Facilities Leasing)
Mobil Corp. ........................................................ 3.0
(Oil/Gas Exploration & Production)
Conseco, Inc. ...................................................... 3.0
(Financial Services Company)
SCI Systems, Inc. (144A)
5.00%, due 5/01/06 ................................................ 2.8
(Electronic Products)
Chase Manhattan Corp. .............................................. 2.7
(Bank)
Automatic Data Processing, Inc. .................................... 2.7
(Data Processing Management)
GTE Corp. .......................................................... 2.7
(Telecommunications)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(July to Dec.) COST (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Sirrom Capital Corp. .............................................. $17,041
USEC, Inc. .......................................................... 9,191
Family Golf Centers, Inc. ........................................... 8,005
Equity Residential Properties Trust .................................. 4,160
Quantum Corp. ....................................................... 3,558
<CAPTION>
TOP FIVE SALES PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
*Anheuser-Busch Co., Inc. ......................................... $10,205
*Avon Products, Inc. ................................................ 5,889
*Crown Cork & Seal 4.50% Cvt. ....................................... 5,523
*Cymer, Inc. (144A) 7.25%, due 8/05/00 ............................... 5,301
*Newell Financial Trust 5.25% Cvt. .................................. 5,300
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
Real Estate Investment Trust ............................................ 8%
Broadcasting (Television, Radio & Cable) ................................. 7
Financial (Diversified) .................................................. 7
Electrical Equipment ..................................................... 6
Telephone ................................................................ 5
- ----------------------------------------------------------------------------
* Security sold, no longer in portfolio.
</TABLE>
- 15 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE INCOME FUND MANAGER
purchased as Anheuser-Busch was sold, and Equity Residential Properties, an
apartment REIT (real estate investment trust). Our allocation to real estate was
7.6% of net assets at year end. I like this sector as it is cheap and, I think,
poised to come back. Furthermore, REITs offer an attractive combination of yield
and dividend growth.
Looking to 1999, I feel some discomfort about the stock market. Earnings of
the S&P 500 companies continue to falter and the Index is selling at lofty
levels by any historical measure. The Fund is currently concentrated in solid
businesses with lower-price earnings ratios and little Asian exposure. I believe
our top ten companies have solid fundamentals and room to appreciate. So do the
smaller companies and convertibles we own, these sectors have just begun to
recover. I think small and mid-cap companies will outperform in 1999 for two
reasons. Firstly, the low valuations of these stocks. Secondly, they stand a
strong chance of providing better relative earnings growth than the big stocks.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS AS A PERCENT OF NET ASSETS
<S> <C>
COMMON STOCKS
(1) Large ($4 Bil. and above) 50%
(2) Medium ($1 Bil. - $4 Bil.) 13%
(3) Small (Less than $1 Bil.) 11%
(4) Preferred Stocks 16%
(5) Corporate Bonds 6%
(6) Cash and Other 4%
</TABLE>
The fourth quarter marked the ninth out of the past eleven quarters that the
Fund has beaten the equity-income category. While I have some concerns about the
stock market, my confidence is bolstered by the Fund's persistent positive
performance relative to our peers.
Thomas Rath
- -------------------------------
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.
- 16 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INCOME FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMON STOCKS - 74.1%
AEROSPACE/DEFENSE - 1.3%
60,000 Lockheed Martin Corp. ............................. $ 5,085
BANKING & FINANCE - 1.5%
99,111 BankAmerica Corp. ................................... 5,959
BANKS (MAJOR REGIONAL) - 0.9%
92,200 Wells Fargo Co. ..................................... 3,682
BANKS (MONEY CENTER) - 2.7%
160,000 Chase Manhattan Corp. .............................. 10,890
BEVERAGES (NON-ALCOHOLIC) - 1.1%
110,000 PepsiCo, Inc. ....................................... 4,503
BROADCASTING (TELEVISION, RADIO & CABLE) - 1.4%
126,800 *Emmis Communications Corp. (Class A) ................ 5,500
COMPUTERS (HARDWARE) - 4.0%
80,500 Hewlett-Packard Co. ................................. 5,499
325,000 *MICROS Systems, Inc. .............................. 10,684
COMPUTERS (PERIPHERALS) - 1.2%
235,000 *Quantum Corp. ...................................... 4,994
ELECTRIC COMPANIES - 4.1%
250,000 NIPSCO Industries, Inc. ............................. 7,609
645,000 USEC, Inc. .......................................... 8,949
ELECTRICAL EQUIPMENT - 2.7%
91,586 AMP, Inc. ........................................... 4,768
60,000 General Electric Co. ................................ 6,124
FINANCIAL (DIVERSIFIED) - 3.1%
70,000 Federal National Mortgage Association ................ 5,180
1,461,200 Sirrom Capital Corp. ................................ 7,215
FOODS - 0.9%
110,000 ConAgra, Inc. ....................................... 3,465
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
HEALTH CARE (DIVERSIFIED) - 4.0%
285,000 American Home Products Corp. ...................... $16,049
HEALTH CARE (DRUGS-MAJOR PHARMACEUTICALS) - 1.6%
45,000 Merck & Co., Inc. ................................... 6,646
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) - 2.3%
174,000 Beckman Coulter, Inc. ............................... 9,440
HOUSEHOLD PRODUCTS (NON-DURABLES) - 2.4%
180,000 Kimberly-Clark Corp. ................................ 9,810
INSURANCE (LIFE-HEALTH) - 3.0%
392,600 Conseco, Inc. ...................................... 11,999
INSURANCE (MULTI-LINE) - 1.9%
140,000 Hartford Financial Services Group, Inc. ............. 7,683
LEISURE TIME (PRODUCTS) - 0.4%
91,600 *Family Golf Centers, Inc. .......................... 1,809
LODGING (HOTELS) - 0.6%
320,000 *Suburban Lodges of America, Inc. ................... 2,620
MANUFACTURING (DIVERSIFIED) - 1.0%
55,000 Minnesota Mining & Manufacturing Co. ................ 3,912
OIL (DOMESTIC INTEGRATED) - 3.0%
140,000 Mobil Corp. ........................................ 12,197
OIL (INTERNATIONAL INTEGRATED) - 5.1%
100,000 Exxon Corp. ......................................... 7,312
100,000 Royal Dutch Petroleum Co. (ADR) ...................... 4,788
160,000 Texaco, Inc. ........................................ 8,460
PAPER & FOREST PRODUCTS - 0.9%
70,000 Weyerhaeuser Co. .................................... 3,557
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 17 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INCOME FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
RAILROADS - 2.4%
252,868 GATX Corp. ........................................ $ 9,577
REAL ESTATE INVESTMENT TRUST - 6.3%
629,000 CCA Prison Realty Trust ............................. 12,895
100,000 Equity Residential Properties Trust .................. 4,044
155,000 First Industrial Realty Trust, Inc. ................. 4,156
185,000 Liberty Property Trust ............................... 4,556
RETAIL (DEPARTMENT STORES) - 1.7%
145,000 J.C. Penney Co., Inc. ............................... 6,797
RETAIL (FOOD CHAINS) - 0.8%
91,000 American Stores Co. ................................. 3,361
SAVINGS & LOANS - 1.6%
171,000 Washington Mutual, Inc. ............................. 6,530
SERVICES (DATA PROCESSING) - 2.7%
135,000 Automatic Data Processing, Inc. .................... 10,825
TELEPHONE - 2.7%
160,000 GTE Corp. .......................................... 10,790
TOBACCO - 2.6%
193,000 Philip Morris Cos., Inc. ........................... 10,326
WASTE MANAGEMENT - 2.2%
275,900 Landauer, Inc. ...................................... 8,932
------
TOTAL COMMON STOCKS ................................................. 299,177
------
PREFERRED STOCKS - 15.7%
BROADCASTING (TELEVISION, RADIO & CABLE) - 5.8%
175,000 Chancellor Media Corp.
7.00% Convertible ................................... 23,559
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
FINANCIAL (DIVERSIFIED) - 3.8%
278,500 Merrill Lynch & Co.
7.875% Convertible ................................. $15,318
INSURANCE (LIFE/HEALTH) - 0.8%
83,800 Conseco Financial Trust Series F
7.00%, due 2/16/01 ................................... 3,232
REAL ESTATE INVESTMENT TRUST - 1.3%
267,700 CCA Prison Realty Trust
8.00% Series A ....................................... 5,387
SERVICES (COMMERCIAL & CONSTRUCTION) - 1.5%
311,200 Central Parking
5.25% Convertible .................................... 6,107
TELEPHONE - 2.5%
148,000 Salomon, Inc.
6.25% Exchangeable Convertible to Cincinnati Bell,
Inc. ................................................ 9,805
------
TOTAL PREFERRED STOCKS ............................................... 63,408
------
CORPORATE BONDS - 6.5%
COMPUTERS (PERIPHERALS) - 1.1%
$4,500,000 Quantum Corp.
7.00%, due 8/01/04 ................................... 4,281
ELECTRICAL EQUIPMENT - 2.8%
5,000,000 #SCI Systems, Inc. (144A)
5.00%, due 5/01/06 (acquired 4/15/98) ............... 11,306
LEISURE TIME (PRODUCTS) - 2.6%
11,500,000 #Family Golf Centers, Inc. (144A)
5.75%, due 10/15/04 (acquired 10/10/97) ............. 10,623
------
TOTAL CORPORATE BONDS ................................................ 26,210
------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 18 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INCOME FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
TEMPORARY INVESTMENTS - 2.7%
INVESTMENT COMPANIES:
$10,818,821 SSgA Prime Money Market Portfolio ................. $ 10,819
------
TOTAL TEMPORARY INVESTMENTS .......................................... 10,819
------
TOTAL INVESTMENTS - 99.0% ........................................... 399,614
Liabilities, less Other Assets ........................................ 3,914
------
NET ASSETS ......................................................... $403,528
------
------
- -----------------------------------------------------------------------------
</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". The total cost of such securities is $19,846,241 and
total value is 5.4% of net assets.
SEE NOTES TO FINANCIAL STATEMENTS
- 19 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO NORTHWEST FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We ended a lousy year with a good fourth quarter. In it, SAFECO Northwest
Fund began recovering from the four blows dealt us earlier in the year: Boeing,
Asia, small caps and value investing.
For the quarter, the Fund returned 21.05%. For the year, we eked out 3.50%
compared to 22.86%, the Lipper, Inc. average for growth funds. We also
underperformed the WM Group Northwest 50 Index, which returned 32.87% for the
year. The Fund was invested less in technology than the index and that caused
the Fund to underperform as technology carried the region.
[PHOTO OF WILLIAM B. WHITLOW, JR.]
While our region benefited by technology, it suffered from the Asian debacle
more than any other. And therein lies the explanation for 75% of the Fund's poor
annual performance when compared to national growth funds.
The other part of the explanation is that 47% of our holdings are small caps,
which as a sector more than disappointed investors.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
<S> <C>
1 Year 3.50%
5 Year 13.05%
Since Inception* 12.20%
</TABLE>
* The Fund's inception was February 7, 1991. Graph and average annual return
comparison begins February 28, 1991.
<TABLE>
<CAPTION>
NORTHWEST S&P 500 WM GROUP NORTHWEST
FUND INDEX 50 INDEX
<S> <C> <C> <C>
02/28/91 $10,000 $10,000 $10,000
03/31/91 $10,295 $10,242 $10,409
04/30/91 $10,596 $10,267 $10,666
05/31/91 $10,958 $10,710 $11,305
06/30/91 $10,317 $10,220 $10,552
07/31/91 $10,932 $10,696 $11,063
08/31/91 $11,386 $10,949 $11,510
09/30/91 $11,106 $10,766 $11,292
10/31/91 $10,995 $10,911 $11,285
11/30/91 $10,318 $10,471 $10,836
12/31/91 $11,573 $11,669 $12,133
01/31/92 $12,072 $11,452 $12,767
02/28/92 $12,459 $11,601 $12,958
03/31/92 $12,185 $11,375 $12,545
04/30/92 $11,757 $11,709 $11,973
05/31/92 $11,879 $11,766 $11,865
06/30/92 $11,504 $11,591 $11,450
07/31/92 $11,770 $12,065 $11,567
08/31/92 $11,453 $11,818 $11,250
09/30/92 $11,931 $11,957 $11,693
10/31/92 $12,329 $11,998 $12,156
11/30/92 $12,850 $12,406 $12,701
12/31/92 $13,202 $12,558 $12,725
01/31/93 $13,255 $12,663 $12,821
02/28/93 $12,605 $12,835 $12,420
03/31/93 $13,098 $13,106 $12,932
04/30/93 $12,563 $12,789 $12,641
05/31/93 $12,836 $13,130 $12,953
06/30/93 $12,715 $13,169 $12,675
07/31/93 $12,610 $13,116 $12,220
08/31/93 $12,967 $13,612 $12,721
09/30/93 $12,957 $13,508 $12,434
10/31/93 $13,125 $13,787 $12,881
11/30/93 $13,177 $13,656 $13,158
12/31/93 $13,338 $13,821 $13,334
01/31/94 $13,574 $14,291 $13,737
02/28/94 $13,917 $13,904 $13,941
03/31/94 $13,328 $13,299 $13,449
04/30/94 $13,295 $13,470 $13,409
05/31/94 $13,499 $13,689 $13,611
06/30/94 $13,154 $13,354 $13,198
07/31/94 $13,347 $13,792 $13,300
08/31/94 $13,948 $14,356 $14,068
09/30/94 $13,629 $14,005 $13,530
10/31/94 $13,499 $14,319 $13,449
11/30/94 $13,163 $13,798 $13,209
12/31/94 $13,131 $14,002 $13,281
01/31/95 $13,293 $14,365 $13,224
02/28/95 $13,629 $14,924 $13,668
03/31/95 $14,084 $15,364 $14,102
04/30/95 $14,269 $15,816 $14,526
05/31/95 $14,485 $16,458 $14,528
06/30/95 $15,201 $16,840 $15,409
07/31/95 $15,992 $17,397 $15,993
08/31/95 $16,133 $17,440 $16,299
09/30/95 $16,220 $18,176 $16,897
10/31/95 $16,029 $18,111 $16,507
11/30/95 $15,995 $18,904 $16,753
12/31/95 $15,780 $19,269 $16,957
01/31/96 $15,930 $19,924 $17,518
02/28/96 $16,415 $20,110 $17,921
03/31/96 $17,409 $20,303 $17,826
04/30/96 $17,882 $20,602 $18,898
05/31/96 $18,183 $21,132 $19,204
06/30/96 $17,803 $21,213 $19,123
07/31/96 $16,960 $20,276 $18,188
08/31/96 $17,504 $20,704 $19,088
09/30/96 $17,778 $21,868 $19,583
10/31/96 $17,327 $22,471 $19,446
11/30/96 $18,088 $24,168 $20,852
12/31/96 $18,153 $23,689 $21,348
01/31/97 $19,468 $25,168 $22,302
02/28/97 $19,482 $25,366 $22,719
03/31/97 $18,656 $24,326 $22,097
04/30/97 $19,327 $25,776 $23,084
05/31/97 $20,617 $27,343 $24,975
06/30/97 $21,804 $28,568 $26,156
07/31/97 $23,674 $30,841 $28,542
08/31/97 $23,055 $29,115 $27,620
09/30/97 $24,204 $30,709 $29,553
10/30/97 $23,069 $29,685 $27,603
11/30/97 $24,074 $31,058 $29,281
12/31/97 $23,802 $31,591 $28,622
01/31/98 $23,582 $31,940 $28,511
02/28/98 $26,003 $34,242 $31,422
03/31/98 $26,333 $35,994 $32,920
04/30/98 $26,979 $36,356 $32,795
05/31/98 $25,012 $35,732 $31,211
06/30/98 $25,576 $37,183 $33,162
07/31/98 $24,009 $36,788 $31,129
08/31/98 $19,237 $31,475 $26,432
09/30/98 $20,351 $33,491 $27,677
10/31/98 $21,630 $36,213 $30,763
11/30/98 $23,472 $38,407 $34,279
12/31/98 $24,635 $40,619 $38,403
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical investment into a relevant market index. The index is
unmanaged. Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 20 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
A perceived crisis in liquidity, a subsequent flight to "quality" and tax-loss
selling sent small caps, as measured by the Russell 2000 Index, tumbling 20.50%
in the third quarter. In the Fourth quarter, small caps rallied, contributing to
the Fund's good quarter.
We would have had an even better fourth quarter if we'd owned more of the ten
stocks that accounted for so much of the S&P 500's 1998 gain. As it is, we own
two of them: Microsoft and Intel.
As with Intel, I am willing to go outside the Northwest to increase
weightings in areas where growth funds tend to concentrate--technology, consumer
staples, healthcare--and where the Northwest seems to be underrepresented. For
example, I took a position in American Home Products, which has controlling
interest in Immunex, a Seattle biotechnology company. At year-end the Fund was
15.40% invested outside the Northwest. We are allowed to invest up to 35% of
assets outside the region.
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Microsoft Corp. ................................................... 7.8%
(Personal Computer Software)
Starbucks Corp. .................................................... 5.7
(Beverage Retailer)
Fred Meyer, Inc. ................................................... 4.7
(Food & Drug Retailer)
Costco Companies, Inc. ............................................. 4.6
(Wholesale Membership Warehouse)
Hewlett-Packard Co. ................................................ 4.4
(Computers)
Eagle Hardware & Garden, Inc. ...................................... 4.3
(Home Improvement Center)
Washington Mutual, Inc. ............................................ 3.8
(Savings & Loan)
TJ International, Inc. ............................................. 3.5
(Building Materials)
Intel Corp. ........................................................ 3.3
(Computer Component Manufacturer)
Weyerhaeuser Co. ................................................... 3.3
(Forestry Products)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES COST
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
ARIS Corp. ......................................................... $1,844
American Home Products Corp. ........................................ 1,655
*ATL Ultrasound, Inc. ............................................... 1,419
Ambassadors International, Inc. ..................................... 1,109
Penford Corporation .................................................... 952
<CAPTION>
TOP FIVE SALES PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
*Physio-Control International Corp. ................................ $3,583
Eagle Hardware & Garden, Inc. ....................................... 1,986
*Sequent Computer Systems, Inc. ..................................... 1,775
*ATL Ultrasound, Inc. ............................................... 1,695
Weyerhaeuser Co. .................................................... 1,388
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
Savings & Loan Companies ................................................ 9%
Computers (Software & Services) .......................................... 8
Restaurants .............................................................. 6
Banks (Major Regional) ................................................... 5
Retail (Department Stores) ............................................... 5
- ----------------------------------------------------------------------------
* Security sold, no longer in portfolio.
</TABLE>
- 21 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE NORTHWEST FUND MANAGER
Costco and Starbucks were big winners for both the quarter and year. I see
these two, and Microsoft, as core holdings for us, as they are non-cyclical
stocks with the capacity to keep growing. Rather than keep cyclicals, such as
Alaska Airlines and Weyerhaeuser as core holdings, I try to capture their upward
cycle.
Boeing had no upside in 1998. I had cut it back to just over 2% by year-end.
(At this writing it has been sold out of the portfolio.) Boeing's pending
layoffs are already reflected in the stocks we own that will be most affected
(regional banks). Ninety percent of our companies are not primarily tied to the
Northwest's economy but to the national and international economies, including
Asia.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS AS A PERCENT OF NET ASSETS
<S> <C>
COMMON STOCKS
(1) Large ($4 Bil. and above) 49%
(2) Medium ($1 Bil. - $4 Bil.) 4%
(3) Small (Less than $1 Bil.) 47%
</TABLE>
I have a sense that the Asian situation is starting to stabilize. Northwest
stocks with exposure to Asia declined early in the crisis and could come back
early in the recovery. For example, Expeditors International, the freight
forwarder, fell 37% in the third quarter, despite the fact it historically
outperforms when imports do well. Schnitzer Steel also fell 37% as one-third of
its business is scrap export to the Pacific Rim.
While published outlooks for the Northwest economy are darker than they have
been, don't let the headlines scare you. I believe the Fund has absorbed much of
the aftermath of Asia, and most of Boeing's impact. And even though the region
is slowing down, we don't expect it to underperform the national economy. Beyond
2000, I believe it will outperform again.
William B. Whitlow, Jr.
- -------------------------------
William B. Whitlow, Jr. began his career at SAFECO in 1976 and left in 1980.
Before re-joining SAFECO in April 1997 as Northwest Fund Manager, he was
Director of Research at Pacific Crest Securities. He holds a BA in chemistry
from the U. of Colorado and an MBA from the U. of Calif. at Berkeley. He is a
CFA and a member of the Washington State Governor's Council of Economic
Advisors.
- 22 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO NORTHWEST FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMON STOCKS - 99.6%
AEROSPACE/DEFENSE - 2.4%
50,000 Boeing Co. ......................................... $1,631
AIR FREIGHT - 3.2%
53,000 Expeditors International of Washington, Inc. ........ 2,226
BANKS (DOMESTIC) - 1.1%
78,000 Heritage Financial Corp. .............................. 761
BANKS (MAJOR REGIONAL) - 5.3%
58,625 U.S. Bancorp ......................................... 2,081
72,558 West Coast Bancorp, Inc. ............................ 1,524
BANKS (REGIONAL) - 1.0%
79,000 Washington Banking Co. ................................ 671
BIOTECHNOLOGY - 2.6%
191,000 *Corixa Corp. ....................................... 1,767
BUILDING MATERIALS - 3.5%
92,000 TJ International, Inc. .............................. 2,363
CHEMICALS (DIVERSIFIED) - 2.9%
123,500 Penford Corporation .................................. 1,976
COMPUTERS (HARDWARE) - 4.4%
44,000 Hewlett-Packard Co. ................................. 3,006
COMPUTERS (SOFTWARE & SERVICES) - 8.4%
38,500 *Microsoft Corp. .................................... 5,339
11,000 *Visio Corp. .......................................... 402
ELECTRONICS (SEMICONDUCTORS) - 3.3%
19,000 Intel Corp. ......................................... 2,253
ENGINEERING & CONSTRUCTION - 2.1%
150,000 *Morrison Knudsen Corp. ............................. 1,462
HEALTH CARE (DIVERSIFIED) - 3.0%
37,000 American Home Products Corp. ........................ 2,084
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
HEALTH CARE (DRUGS-GENERAL) - 2.3%
27,000 *PathoGenesis Corp. ................................ $1,566
HEALTH CARE (LONG TERM CARE) - 2.5%
162,000 *Emeritus Corp. ..................................... 1,711
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) - 2.6%
245,000 *Protocol Systems, Inc. ............................. 1,746
IRON & STEEL - 2.4%
112,000 Schnitzer Steel Industries, Inc. .................... 1,610
LEISURE TIME (PRODUCTS) - 2.7%
124,600 *Ambassadors International, Inc. .................... 1,838
LODGING (HOTELS) - 2.1%
132,800 *Cavanaughs Hospitality Corp. ....................... 1,428
MANUFACTURING (SPECIALIZED) - 1.2%
75,000 *SeaMED Corp. ......................................... 844
PAPER & FOREST PRODUCTS - 3.3%
44,000 Weyerhaeuser Co. .................................... 2,236
PHARMACEUTICALS - 1.6%
177,000 *Penwest Pharmaceuticals Co. ........................ 1,106
RESTAURANTS - 5.7%
70,000 *Starbucks Corp. .................................... 3,929
RETAIL (BUILDING SUPPLIES) - 4.3%
91,000 *Eagle Hardware & Garden, Inc. ...................... 2,957
RETAIL (DEPARTMENT STORES) - 4.7%
53,000 *Fred Meyer, Inc. ................................... 3,193
RETAIL (FOOD CHAINS) - 3.2%
34,000 Albertson's, Inc. ................................... 2,165
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 23 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO NORTHWEST FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
RETAIL (GENERAL MERCHANDISE) - 4.6%
44,000 *Costco Companies, Inc. ........................... $ 3,176
SAVINGS & LOANS - 8.5%
45,000 InterWest Bancorp, Inc. ............................... 996
64,000 Riverview Bancorp, Inc. ............................... 784
84,000 *Sterling Financial Corp. ........................... 1,428
68,500 Washington Mutual, Inc. ............................. 2,616
SERVICES (DATA PROCESSING) - 3.1%
180,000 *ARIS Corp. ......................................... 2,149
TELEPHONE - 1.6%
38,000 *NEXTLINK Communications, Inc. (Class A) ............. 1,078
-----
TOTAL COMMON STOCKS .................................................. 68,102
-----
TOTAL INVESTMENTS - 99.6% ............................................ 68,102
Other Assets, less Liabilities .......................................... 303
-----
NET ASSETS .......................................................... $68,405
-----
-----
- -----------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
- 24 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO INTERNATIONAL STOCK FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The SAFECO International Fund returned 14.26% for the year and 19.24% for the
quarter, beating its peer group on both counts. The average international fund
returned 13.02% for the year and 16.43% in the fourth quarter according to
Lipper, Inc. For the year, the EAFE Index returned 18.23%.
For all of 1998, stocks in the Growth in Telecommunications theme were the
largest contributors to the portfolio's performance. Notwithstanding the turmoil
in global capital markets during the third quarter, financial stocks in Growth
in Personal Savings Products also added significant value to the portfolio, as
did the pharmaceutical stocks in Healthcare Needs.
Most of the portfolio's negative performance came from stocks either quoted
in, or with exposure, to Asia. The portfolio's hedging program also detracted
value, mostly as a result of renewed strength in the yen, which we believe
remains overvalued, given the underlying weaknesses in the Japanese economy.
The most notable performers among our telecommunications
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
<S> <C>
1 Year 14.26%
Since Inception* 11.25%
</TABLE>
* Graph and average annual return comparison begins January 31, 1996,
inception date of the fund.
<TABLE>
<CAPTION>
INTERNATIONAL
FUND EAFE INDEX
<S> <C> <C>
01/31/96 $10,000 $10,000
02/28/96 $9,940 $10,034
03/31/96 $10,040 $10,247
04/30/96 $10,290 $10,545
05/31/96 $10,250 $10,351
06/30/96 $10,240 $10,409
07/31/96 $9,840 $10,105
08/31/96 $10,240 $10,127
09/30/96 $10,454 $10,396
10/31/96 $10,585 $10,290
11/30/96 $11,249 $10,699
12/31/96 $11,423 $10,561
01/30/97 $11,382 $10,192
02/28/97 $11,534 $10,358
03/31/97 $11,463 $10,396
04/30/97 $11,514 $10,451
05/31/97 $12,050 $11,131
06/30/97 $12,414 $11,731
07/31/97 $12,850 $11,907
08/31/97 $11,747 $11,004
09/30/97 $12,556 $11,607
10/30/97 $11,514 $10,700
11/30/97 $11,585 $10,577
12/31/97 $11,943 $10,656
01/31/98 $12,203 $11,130
02/28/98 $13,013 $11,829
03/31/98 $13,521 $12,179
04/30/98 $13,594 $12,261
05/31/98 $13,718 $12,187
06/30/98 $13,854 $12,265
07/31/98 $14,010 $12,375
08/31/98 $12,181 $10,827
09/30/98 $11,445 $10,480
10/31/98 $12,317 $11,557
11/30/98 $13,272 $12,135
12/31/98 $13,646 $12,599
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical investment into a relevant market index. The index is
unmanaged. Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 25 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE INTERNATIONAL STOCK FUND MANAGER
stocks were Netherlands-quoted KPN which announced a joint venture to create
Europe's biggest internet network and Alcatel Alsthom. Alcatel climbed on by
acquisitions in Europe, restructuring plans and news that, with Fujitsu, it will
supply the trans-Pacific cable link between Australia and the U.S.
Stocks in Positive Banking Environment, which had been at the eye of the
storm during the third quarter turmoil, strengthened significantly as 1998 wound
down.
Among pharmaceutical stocks the best performers were Takeda Chemical (Japan),
which announced 15% increase in net profits and Novartis. A renewal of mergers
and acquisitions activity in the European pharmaceutical sector which involved,
among others, portfolio holdings Hoechst and Zeneca also drove prices higher.
On the whole, global equity markets rebounded strongly since the end of the
third quarter, prompted primarily by the reductions in interest rates which have
occurred in the U.S. and Europe.
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Mannesmann AG ...................................................... 3.5%
(Machinery & Engineering)
ING Groupe NV ....................................................... 3.3
(Banking & Finance)
Glaxo Wellcome, plc ................................................. 2.5
(Pharmaceuticals)
Takeda Chemical Industries .......................................... 2.5
(Health Care Products)
Nestle SA ........................................................... 2.4
(Food)
Schweizerische Rueckversicherungs- Gesellschaft ..................... 2.3
(Insurance)
Vivendi ............................................................. 2.3
(Community Services)
Novartis AG ......................................................... 2.2
(Pharmaceuticals)
Vodafone Group, plc ................................................. 2.1
(Telecommunications)
Lloyds TSB Group, plc ............................................... 1.9
(Bank)
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE COUNTRIES NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
United Kingdom ......................................................... 25%
Japan ................................................................... 12
Switzerland ............................................................. 11
Netherlands .............................................................. 8
Germany .................................................................. 8
<CAPTION>
TOP FIVE PURCHASES COST
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Vivendi ............................................................... $241
NTT Mobile Communication Network, Inc. ................................ 231
Axa .................................................................... 153
Alcatel ................................................................ 140
Fuji Photo Film Co. ................................................... 139
<CAPTION>
TOP FIVE SALES PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
*HSBC Holdings, plc ................................................... $173
Novartis AG ............................................................ 135
Zeneca Group, plc ...................................................... 120
Honda Motor Co., Ltd. ................................................. 104
National Australian Bank, Ltd. ......................................... 98
- ----------------------------------------------------------------------------
* Security sold, no longer in portfolio.
</TABLE>
- 26 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
The general consensus underpinning this recovery seems to be that the lower
interest rates will enable continued corporate earnings growth.
We do not subscribe to this theory, given the announcements the companies
themselves are releasing. In recent weeks, from diverse sectors, global
companies such as Boeing, Ericsson, Marks & Spencer's, Proctor & Gamble and
Coca-Cola have all announced earnings slowdowns. Paradoxically, in the face of
bad news, indexes are reaching all-time highs, and some stock prices are rising
to what we consider to be risky valuation levels.
Economic growth in the UK is likely to slow in 1999 and earnings growth may
be negligible. Much of this, however, may already be priced into the market
given the relative underperformance of UK equities in 1998.
In Asia, it was a year of upheaval as unemployment skyrocketed, financial
systems came under severe distress and political leaders came under pressure.
While the overall economic environment remains gloomy, the unexpected cut in
U.S. interest rates gave an added stimulus to Asian markets, which were already
benefiting from the stronger yen and increasing investor confidence.
Nevertheless, there are some positives on the international equity horizon.
The advent of the Euro should be broadly positive for the large pan-European
companies. There has been a resurgence in recent weeks in mergers and
acquisitions activity and this should accelerate in the coming months. Indeed,
given Europe's position in the current economic cycle, the opportunities for
increasing synergies and cutting costs through consolidation are significantly
greater than those in the U.S.
There continues to be evidence that reform is taking place in Japan, albeit
at the margins. While the government has yet to come through, reform-minded
Japanese corporations have considerable potential for long-term investors. We
will continue to concentrate on European stocks that have the ability to prosper
in the single currency environment and selected companies in Japan.
Bank of Ireland
Asset Management (U.S.) Limited
- -------------------------------
The Bank of Ireland Asset Management (U.S.) Limited (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.
- 27 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INTERNATIONAL STOCK FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMON STOCKS - 81.2%
AUSTRALIA - 3.5%
20,650 National Australia Bank, Ltd. ........................ $312
(Banking & Finance)
47,164 News Corp., Ltd. ...................................... 312
(Television & Publishing)
41,800 Telstra Corp., Ltd. ................................... 196
(Telecommunications)
CANADA - 0.1%
525 Royal Bank of Canada .................................... 26
(Banking & Finance)
DENMARK - 0.5%
930 Tele Danmark AS-B ...................................... 126
(Telecommunications)
FRANCE - 6.8%
1,853 Alcatel ................................................ 227
(Telecommunications)
2,945 Axa .................................................... 426
(Multi-Line Insurance)
2,830 Michelin B ............................................. 113
(Tire & Rubber)
3,080 Total SA ............................................... 312
(Oil & Gas)
2,049 Vivendi ................................................ 531
(Holding Co. - Diversified)
GERMANY - 7.9%
280 Bayerische Motoren Werke AG ............................ 217
(Automobiles)
2,930 Bayerische HypoVereinsbank ............................. 229
(Banking & Finance)
5,455 Hoechst AG ............................................. 226
(Chemicals)
7,160 Mannesmann AG .......................................... 821
(Machinery & Engineering)
3,915 VEBA AG ................................................ 234
(Utilities - Electric)
204 Viag AG ................................................ 120
(Manufacturing - Diversified)
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
ITALY - 2.2%
14,053 Ente Nazionale Idrocarburi SpA ........................ $ 92
(Oil & Gas)
48,461 Telecom Italia SpA ..................................... 414
(Telecommunications)
JAPAN - 12.2%
18,000 Canon, Inc. ........................................... 385
(Office Equipment)
7,000 Dai Nippon Printing Co., Ltd. ......................... 112
(Commercial Printing)
4,000 Fuji Photo Film Co. ................................... 149
(Office Equipment & Supplies)
6,000 Honda Motor Co., Ltd. ................................. 197
(Automobiles)
11,000 Kao Corp. ............................................. 249
(Cosmetics & Toiletries)
900 Keyence Corp. ......................................... 111
(Electronics)
4,000 Murata Manufacturing Co., Ltd. ........................ 166
(Electronics)
5 NTT Mobile Communication Network, Inc. ................ 206
(Telecommunications)
2,000 Rohm Co., Ltd. ........................................ 182
(Electronics)
9,000 Shiseido Co., Ltd. .................................... 116
(Cosmetics & Toiletries)
5,700 Sony Corp. ............................................ 416
(Audio/Video Products)
15,000 Takeda Chemical Industries ............................. 578
(Medical - Drugs)
MEXICO - 0.1%
17,540 Grupo Financiero Series B ............................... 23
(Banking & Finance)
NETHERLANDS - 8.3%
7,448 ABN Amro Holdings NV ................................... 157
(Banking & Finance)
8,330 Elsevier NV ............................................ 117
(Publishing)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 28 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INTERNATIONAL STOCK FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
12,797 ING Groep N.V. ....................................... $781
(Banking & Finance)
5,890 Koninklijke Ahold NV ................................... 218
(Retail Grocery)
6,085 Koninklijke KPN NV ..................................... 305
(Telecommunications)
4,080 Royal Dutch Petroleum Co. ............................. 203
(Oil & Gas)
5,160 TNT Post Group NV ...................................... 166
(Commercial Services)
PHILIPPINES - 0.1%
15,300 San Miguel Corp. (Class B) .............................. 30
(Wine & Spirits, Food)
PORTUGAL - 0.3%
2,875 Electricidade de Portugal, S.A. ........................ 63
(Electric - Integrated)
SINGAPORE - 1.7%
26,200 Development Bank of Singapore, Ltd. ................... 236
(Banking & Finance)
15,274 Singapore Press Holdings, Ltd. ........................ 166
(Publishing)
SPAIN - 1.5%
11,525 Banco Santander SA ..................................... 229
(Banking & Finance)
3,050 Telefonica S.A. ....................................... 135
(Telecommunications)
SWITZERLAND - 10.6%
161 Alusuisse-Lonza Holding AG ............................. 188
(Holding Co. - Diversified)
258 Nestle SA .............................................. 562
(Food)
261 Novartis AG ............................................ 514
(Pharmaceuticals)
30 Roche Holding AG ....................................... 366
(Pharmaceuticals)
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
207 Schweizerische Rueckversicherungs-Gesellschaft ........ $540
(Insurance)
1,040 UBS AG ................................................. 320
(Banking & Finance)
THAILAND - 0.4%
40,400 Bangkok Bank Public Co., Ltd. ........................... 83
(Banking & Finance)
UNITED KINGDOM - 25.0%
28,315 Allied Zurich, plc ..................................... 424
(Tobacco)
18,850 Barclays, plc .......................................... 405
(Banking & Finance)
25,515 British American Tobacco, plc .......................... 226
(Tobacco)
23,650 Cable & Wireless, plc .................................. 291
(Telecommunications)
14,530 Cadbury Schweppes, plc ................................. 247
(Beverages)
29,010 Diageo, plc ............................................ 326
(Beverages)
17,060 Glaxo Wellcome, plc .................................... 585
(Pharmaceuticals)
23,830 Granada Group, plc ..................................... 423
(Leisure)
18,000 Kingfisher, plc ........................................ 195
(Retail - Drug Store)
31,340 Ladbroke Group, plc .................................... 125
(Hotels & Property Management)
31,340 Lloyds TSB Group, plc .................................. 445
(Banking & Finance)
7,690 National Westminster Bank, plc ......................... 148
(Banking & Finance)
27,070 Prudential Corp., plc .................................. 409
(Insurance)
25,210 Safeway, plc ........................................... 126
(Retail - Grocery)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 29 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INTERNATIONAL STOCK FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
49,150 Shell Transport & Trading Co., plc .................. $ 301
(Oil & Gas)
64,400 Siebe, plc ............................................. 253
(Industrial & Electronic Equipment)
23,100 TI Group, plc .......................................... 125
(Manufacturing)
30,370 Vodafone Group, plc .................................... 493
(Telecommunications)
7,965 Zeneca Group, plc ...................................... 349
(Pharmaceuticals)
-----
TOTAL COMMON STOCKS .................................................. 19,099
-----
TOTAL INVESTMENTS - 81.2% ............................................ 19,099
Domestic Cash .......................................... 951
Foreign Cash ........................................... 235
Other Assets, less
Liabilities .......................................... 3,232
-----
4,418
-----
NET ASSETS .......................................................... $23,517
-----
-----
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION
PERCENT OF
NET ASSETS
- -----------------------------------------------------------------------------
<S> <C>
Banking & Finance 14.4%
Pharmaceuticals 10.2
Telecommunications 10.2
Insurance 5.8
Food 3.9
Oil & Gas 3.9
Electrical Equipment & Electronics 3.7
Machinery - Diversified 3.5
Holding Company Diversified 3.1
Tobacco 2.8
Publishing 2.5
Leisure Time 2.3
Office Equipment & Supplies 2.3
Automobiles 2.2
Cosmetics 1.5
Retail - Grocer 1.5
Electric Utility 1.3
Building Materials 1.1
Beverages 1.0
Chemicals 1.0
Manufacturing 1.0
Retail - Drug Stores 0.8
Transportation 0.7
Tire & Rubber 0.5
----
81.2%
----
----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 30 -
<PAGE>
REPORT FROM THE FUND MANAGERS
SAFECO BALANCED FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The SAFECO Balanced Fund returned 10.17% and 12.56%, for the fourth quarter
and the year, respectively, while the average balanced fund returned 11.32% and
13.48%. Although the Fund's return for the year was slightly below the Lipper,
Inc. average for balanced funds, there was enough dispersion in returns that the
Fund ranked in the top half of the peer group.
A split benchmark (60% S&P 500 and 40% Lehman Brothers Government/Corporate
Index) returned 12.82% and 20.93% for the quarter and year. We underperformed
the combined index because we are value investors and value stocks
underperformed growth stocks. (On the bond side, the portfolio outperformed, but
not enough to carry the Fund.)
[PHOTO OF REX BENTLEY]
In 1998, the stock market experienced a huge disparity between growth and
value style investing. For example, the Russell 1000 Growth Index was up 37.41%
while the Russell 1000 Value Index posted just 13.21%. This spread in returns is
by far
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
<S> <C>
1 Year 12.56%
Since Inception* 13.92%
</TABLE>
* Graph and average annual return comparison begins January 31, 1996,
inception date of the fund.
<TABLE>
<CAPTION>
60% S&P 500/40%
LEHMAN BROTHERS
GOVERNMENT/
BALANCED FUND CORPORATE INDEX
<S> <C> <C>
01/31/96 10,000 10,000
02/28/96 9,950 9,971
03/31/96 10,017 9,995
04/30/96 10,077 10,056
05/31/96 10,218 10,204
06/30/96 10,345 10,282
07/31/96 10,112 10,019
08/31/96 10,243 10,137
09/30/96 10,599 10,551
10/31/96 10,813 10,824
11/30/96 11,272 11,394
12/31/96 11,140 11,208
01/30/97 11,473 11,633
02/28/97 11,567 11,698
03/31/97 11,162 11,354
04/30/97 11,414 11,826
05/31/97 11,896 12,302
06/30/97 12,209 12,692
07/31/97 12,905 13,453
08/31/97 12,419 12,941
09/30/97 12,759 13,447
10/30/97 12,622 13,264
11/30/97 12,834 13,660
12/31/97 12,993 13,858
01/31/98 13,083 14,028
02/28/98 13,653 14,624
03/31/98 13,964 15,091
04/30/98 13,884 15,212
05/31/98 13,760 15,106
06/30/98 13,806 15,535
07/31/98 13,500 15,441
08/31/98 12,593 14,224
09/30/98 13,275 14,933
10/31/98 13,983 15,619
11/30/98 14,417 16,224
12/31/98 14,625 16,800
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical investment into a relevant market index. The index is
unmanaged. Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 31 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE BALANCED FUND MANAGERS
the largest divergence between the two indices in their 20-year history. As
well, a study of the S&P 500 shows that stocks with the loftiest price/earnings
valuations had the best performance.
The equities of this Fund are selected for value and earnings growth. For
example, we sold our position in Anheuser-Busch and replaced it with PepsiCo,
which we felt was priced at a more compelling valuation based on near-term
restructuring opportunities and long-term earnings prospects. As year-end
approached, we sold Boeing to offset some portfolio gains and sold Sequent
Computer Systems and Unisource Worldwide due to weak near-term fundamentals.
Early in the fourth quarter, we increased the weighting in financials and
technology as price opportunities arose.
[PHOTO OF LYNETTE D. SAGVOLD]
[PHOTO OF MICHAEL HUGHES]
Our strategy in managing the equities in the Fund remains unchanged. We buy
stocks with discount valuation characteristics that have attractive earnings
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN STOCK HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Kimberly-Clark Corp. .............................................. 2.4%
(Manufacturing & Marketing Personal Care Products)
GTE Corp. .......................................................... 1.9
(Telecommunications)
Hewlett-Packard Co. ................................................ 1.8
(Computers)
Mobil Corp. ........................................................ 1.7
(Oil/Gas Exploration & Production)
Corning, Inc. ...................................................... 1.7
(Manufacturer of Specialty and Consumer Products)
Chase Manhattan Corp. .............................................. 1.7
(Bank)
Bell Atlantic Corp. ................................................ 1.7
(Telecommunications)
Merck & Co., Inc. .................................................. 1.7
(Health Care Products)
Century Telephone Enterprises, Inc. ................................ 1.7
(Telecommunications)
The New York Times Co. (Class A) .................................... 1.6
(Newspaper Publisher)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(COMMON STOCKS)
(July to Dec.) COST (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Conseco, Inc. ........................................................ $326
Compaq Computer Corp. ................................................. 311
Rubbermaid, Inc. ...................................................... 310
Washington Mutual, Inc. ............................................... 278
Wendy's International, Inc. ........................................... 275
<CAPTION>
TOP FIVE SALES
(COMMON STOCKS) PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
*Boeing Co. .......................................................... $387
*Anheuser-Busch Co., Inc. ............................................. 371
*NationsBank Corp. .................................................... 245
*Burlington Northern Santa Fe Corp. ................................... 193
Armstrong World Industries, Inc. ...................................... 183
<CAPTION>
TOP FIVE INDUSTRIES PERCENT OF
(COMMON STOCKS) NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
Telephone ............................................................... 5%
Manufacturing (Diversified) .............................................. 5
Oil (Domestic Integrated) ................................................ 3
Computers (Hardware) ..................................................... 3
Health Care (Diversified) ................................................ 3
- ----------------------------------------------------------------------------
* Security sold, no longer in portfolio.
</TABLE>
- 32 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
prospects. The portfolio has a price earnings ratio (P/E) based on 1999
projected earnings of 18.2 compared to the S&P 500's P/E of 25.9. The projected
earnings growth rate for the stocks in our portfolio is higher than that of the
S&P 500. The Fund's equity portfolio is diversified across all major market
sectors.
This strategy has been employed at SAFECO for many years and has provided
superior returns at lower risk levels over time. We remain confident the value
style will once again return to favor.
At year-end, the asset allocation of the fund was 63.3% stocks and 36.3%
bonds, while the cash position was 1.3%. We are currently targeting a 60% equity
and 40% fixed-income asset allocation.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS AS A PERCENT OF NET ASSETS
<S> <C>
(1) Large ($4 Bil. and above) 54%
(2) Medium ($1 Bil. - $4 Bil.) 9%
(3) Small (Less than $1 Bil.) 0%
(4) Corporate Bonds 12%
(5) Asset Backed Securities 6%
(6) U.S. Government Securities 19%
(7) Cash and Other 0%
</TABLE>
We took some defensive precautions to improve the overall quality and
liquidity of our bond portfolio during the quarter. We reduced our holdings in
smaller corporate bonds, international issues, and triple-B rated securities, in
favor of extremely large, high quality domestic bonds and U.S. Treasuries.
At year-end, the bond portion of the Fund held 64% of its assets in U.S.
Government obligations, including a 51% weighting in U.S. Treasuries. Portfolio
duration was unchanged at 5.8 years, slightly longer than the 5.6 year duration
of the Lehman Brothers Government/Corporate Index. The average credit quality of
the portfolio improved to AAA.
Our outlook for 1999 is mixed. While the U.S. economy continues to do well,
it is likely that corporate earnings growth will slow. This reduced earnings
growth, combined with current high valuations, will probably result in a lower
stock market return. The outlook for bonds is more positive, which makes a case
for diversification.
Rex L. Bentley
Michael Hughes
Lynette D. Sagvold
- -------------------------------
Rex Bentley, an MBA from Brigham Young University and Chartered Financial
Analyst, has more than 20 years of investment experience.
Lynette D. Sagvold holds a BA in business administration from the University of
Washington and is a Chartered Financial Analyst. She began her investment career
in 1981 at Kidder Peabody and was a trust officer for Key Trust and First
Interstate before joining SAFECO as a portfolio manager and insurance analyst.
Michael Hughes joined SAFECO as portfolio manager in January 1997. He began his
investment career in 1983. He graduated magna cum laude with a B.S. in finance
from University of Colorado in Boulder and holds an MBA from the University of
Southern California in Los Angeles. He is a Chartered Financial Analyst.
- 33 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO BALANCED FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMON STOCKS - 63.3%
AEROSPACE/DEFENSE - 0.7%
1,800 Lockheed Martin Corp. ................................ $153
BANKS (MAJOR REGIONAL) - 1.3%
9,100 KeyCorp ................................................ 291
BANKS (MONEY CENTER) - 1.7%
5,600 Chase Manhattan Corp. ................................. 381
BANKS (REGIONAL) - 1.5%
6,330 Banc One Corp. ........................................ 323
BEVERAGES (NON-ALCOHOLIC) - 1.1%
6,000 PepsiCo, Inc. ......................................... 246
BUILDING MATERIALS - 0.8%
3,100 Armstrong World Industries, Inc. ...................... 187
CHEMICALS - 1.8%
2,400 Du Pont (E.I.) de Nemours & Co. ....................... 127
7,700 Praxair, Inc. ......................................... 271
COMMUNICATIONS EQUIPMENT - 1.4%
4,900 Motorola, Inc. ........................................ 299
COMPUTERS (HARDWARE) - 3.0%
6,600 Compaq Computer Corp. ................................. 277
5,700 Hewlett-Packard Co. ................................... 389
COMPUTERS (PERIPHERALS) - 1.1%
11,200 *Quantum Corp. ........................................ 238
ELECTRIC COMPANIES - 2.6%
10,200 NIPSCO Industries, Inc. ............................... 310
5,200 New Century Energies, Inc. ............................ 254
ELECTRICAL EQUIPMENT - 0.7%
2,878 AMP, Inc. ............................................. 150
ELECTRONICS (SEMICONDUCTORS) - 1.2%
2,300 Intel Corp. ........................................... 273
FINANCIAL (DIVERSIFIED) - 2.5%
3,800 American General Corp. ................................ 296
3,500 Federal National Mortgage Association .................. 259
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
FOODS - 2.0%
8,800 ConAgra, Inc. ........................................ $277
4,100 Dean Foods Co. ........................................ 167
HEALTH CARE (DIVERSIFIED) - 2.6%
4,000 American Home Products Corp. .......................... 225
4,100 Johnson & Johnson ...................................... 344
HEALTH CARE (DRUGS-MAJOR PHARMUCEUTICALS) - 1.7%
2,500 Merck & Co., Inc. ..................................... 369
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) - 1.3%
5,500 Beckman Coulter, Inc. ................................. 298
HOUSEHOLD FURNITURE & APPLIANCES - 0.9%
6,000 Rubbermaid, Inc. ...................................... 189
HOUSEHOLD PRODUCTS (NON-DURABLES) - 2.4%
9,800 Kimberly-Clark Corp. .................................. 534
INSURANCE (LIFE-HEALTH) - 1.0%
7,400 Conseco, Inc. ......................................... 226
INSURANCE (MULTI-LINE) - 1.3%
5,100 Hartford Financial Services Group, Inc. ............... 280
MANUFACTURING (DIVERSIFIED) - 5.1%
5,000 AlliedSignal, Inc. .................................... 222
8,500 Corning, Inc. ......................................... 383
10,100 Crane Co. ............................................. 305
3,000 Minnesota Mining & Manufacturing Co. .................. 213
OIL (DOMESTIC INTEGRATED) - 3.3%
5,300 Atlantic Richfield Co. ................................ 346
4,400 Mobil Corp. ........................................... 383
OIL (INTERNATIONAL INTEGRATED) - 1.4%
5,700 Texaco, Inc. .......................................... 301
OIL & GAS (DRILLING & EQUIPMENT) - 0.9%
6,600 Halliburton Co. ....................................... 196
PAPER & FOREST PRODUCTS - 1.1%
5,300 International Paper Co. ............................... 238
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 34 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO BALANCED FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
PERSONAL CARE - 1.0%
4,900 Avon Products, Inc. ................................ $ 217
PUBLISHING (NEWSPAPERS) - 1.6%
10,200 New York Times Co. (Class A) ........................... 354
REAL ESTATE INVESTMENT TRUST - 1.9%
3,200 Equity Residential Properties Trust .................... 129
5,700 First Industrial Realty Trust, Inc. ................... 153
5,800 Liberty Property Trust ................................. 143
RESTAURANTS - 1.3%
12,800 Wendy's International, Inc. ........................... 279
RETAIL (DEPARTMENT STORES) - 2.0%
6,000 J.C. Penney Co., Inc. ................................. 281
2,700 May Department Stores Co. ............................. 163
RETAIL (FOOD CHAINS) - 1.3%
8,000 American Stores Co. ................................... 296
SAVINGS & LOAN CO. - 1.4%
8,100 Washington Mutual, Inc. ............................... 309
SERVICES (DATA PROCESSING) - 0.6%
1,800 Automatic Data Processing, Inc. 144
TELEPHONE - 5.2%
6,500 Bell Atlantic Corp. ................................... 369
5,400 Century Telephone Enterprises, Inc. ................... 365
6,200 GTE Corp. ............................................. 418
TOBACCO - 0.6%
2,700 Philip Morris Cos., Inc. .............................. 145
-----
TOTAL COMMON STOCKS .................................................. 13,985
-----
CORPORATE BONDS - 11.6%
BANKING & FINANCE - 0.5%
$100,000 Grand Metropolitan Investment Corp.
8.625%, due 8/15/01 .................................... 107
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
BANKS (MAJOR REGIONAL) - 0.5%
$100,000 Norwest Corp. (MTN)
6.25%, due 3/15/01 .................................... $102
BANKS (MONEY CENTER) - 1.0%
100,000 BankAmerica Corp.
9.50%, due 4/01/01 ..................................... 109
100,000 Citicorp
7.625%, due 5/01/05 .................................... 109
BANKS (REGIONAL) - 0.6%
135,000 U.S. Bancorp
6.75%, due 10/15/05 .................................... 142
ELECTRIC COMPANIES - 0.6%
140,000 #Israel Electric Corp., Ltd. (144A)
7.125%, due 7/15/05 (acquired 7/21/98) ................. 144
ENGINEERING & CONSTRUCTION - 0.4%
75,000 Halliburton Co.
6.75%, due 2/01/27 ...................................... 85
FINANCE (CONSUMER) - 0.4%
85,000 Household Finance Corp.
7.25%, due 7/15/03 ...................................... 90
FINANCIAL (DIVERSIFIED & BUSINESS) - 1.5%
200,000 CIT Group, Inc.
5.57%, due 12/08/03 .................................... 199
130,000 Comed Transitional Funding Trust
5.674%, due 12/16/08 ................................... 131
FINANCIAL (DIVERSIFIED) - 2.1%
100,000 American General Finance Corp.
5.75%, due 11/01/03 .................................... 100
80,000 General Motors Acceptance Corp.
6.875%, due 7/15/01 ..................................... 82
175,000 Hertz Corp.
7.00%, due 7/01/04 ..................................... 184
90,000 Merrill Lynch & Co. , Inc.
6.00%, due 11/15/04 ..................................... 91
FINANCIAL (MISCELLANEOUS) - 0.9%
100,000 Commercial Credit Co.
5.875%, due 1/15/03 .................................... 101
95,000 McDonnell Douglas Corp.
6.83%, due 5/21/01 ...................................... 98
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 35 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO BALANCED FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
INVESTMENT BANKING/BROKERAGE - 0.6%
$ 130,000 Donaldson Lufkin & Jenrette, Inc.
6.90%, due 10/01/07 .................................. $ 134
PETROLEUM & PETROLEUM SERVICES - 0.5%
100,000 Texaco Capital, Inc.
6.19%, due 7/09/03 ..................................... 102
RETAIL (COMPUTERS & ELECTRONICS) - 1.0%
200,000 Tandy Corp.
6.95%, due 9/01/07 ..................................... 211
RETAIL (GENERAL MERCHANDISE) - 0.5%
100,000 Sears Roebuck Acceptance Corp.
6.90%, due 8/01/03 ..................................... 104
RETAIL (SPECIALTY) - 0.2%
50,000 Bausch & Lomb, Inc.
6.56%, due 8/12/26 ...................................... 50
UTILITIES - 0.3%
75,000 Allegheny Generating Co.
5.625%, due 9/01/03 ..................................... 75
-----
TOTAL CORPORATE BONDS ................................................. 2,550
-----
U.S. GOVERNMENT SECURITIES - 18.7%
U.S. TREASURY NOTES - 18.7%
920,000 7.50%, due 11/15/16 .................................. 1,144
945,000 7.25%, due 8/15/04 ................................... 1,063
230,000 6.50%, due 8/15/05 ..................................... 253
1,155,000 5.625%, due 5/15/08 .................................. 1,232
425,000 4.75%, due 11/15/08 .................................... 428
-----
TOTAL U.S. GOVERNMENT SECURITIES ...................................... 4,120
-----
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
ASSET BACKED SECURITIES - 6.0%
COLLATERIZED MORTGAGE OBLIGATION (CMO) - 5.4%
$189,900 DLJ MTG 1998-CF1 A1A
6.14%, due10/15/06 .................................. $ 193
250,000 FHLMC REMIC 1579
6.55%, due 6/15/22 ..................................... 252
200,000 FHLMC REMIC 1688
6.00%, due 10/15/07 .................................... 202
75,000 FNMA 1997-M5 C
6.74%, due 8/25/07 ...................................... 79
125,000 FNMA G93-33J
6.75%, due 6/25/22 ..................................... 128
100,000 FNMA REMIC 1993-23
6.70%, due 7/25/19 ..................................... 101
125,000 FNMA REMIC 1993-44PH
6.75%, due 5/25/19 ..................................... 127
100,000 FNMA REMIC 1993-55
6.50%, due 2/25/05 ..................................... 102
CONSUMER (FINANCE) - 0.6%
70,486 AFG Receivables Trust
6.20%, due 2/15/03 ...................................... 71
75,000 Premier Auto Trust
6.20%, due 1/06/01 ...................................... 76
-----
TOTAL ASSET BACKED SECURITIES ......................................... 1,331
-----
TEMPORARY INVESTMENTS - 1.3%
INVESTMENT COMPANIES:
290,691 SSgA Prime Money Market Portfolio ...................... 291
-----
TOTAL TEMPORARY INVESTMENTS ............................................. 291
-----
TOTAL INVESTMENTS - 100.9% ........................................... 22,277
Liabilities, less Other Assets ........................................ (191)
-----
NET ASSETS .......................................................... $22,086
-----
-----
- -----------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
# Security is exempt from registration and restricted as to resale only to
dealers, or through a dealer to an accredited investor or a qualified
institutional buyer. The total cost of this security is $139,731 and total
value is .65% of net assets.
SEE NOTES TO FINANCIAL STATEMENTS
- 36 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO SMALL COMPANY STOCK FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SAFECO Small Company Fund had a disappointing fourth quarter and year, which
I attribute, not to stock selection, but to "attributes"--our smaller market
capitalization and the value orientation of the Fund.
For the fourth quarter 1998, the Fund returned 3.62% while the average small
company fund gained 19.12% according to Lipper, Inc. For the year, the Fund was
down 21.57%, versus the peer group average of -0.33%.
The Russell 2000 Index returned -3.45% for the year and 16.05% for the
quarter. Our underperformance for the year and our lag during the fourth quarter
recovery, is not due to problems with any particular stock. It was due to the
type of stocks I favored--smaller and cheaper than those held by my peers.
[PHOTO OF GREG EISEN]
While the Fund held strong companies during the quarter, their stocks were
largely ignored
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
<S> <C>
1 Year -21.57%
Since Inception* 6.74%
</TABLE>
* Graph and average annual return comparison begins January 31, 1996,
inception date of the fund.
<TABLE>
<CAPTION>
SMALL COMPANY RUSSELL 2000
FUND INDEX
<S> <C> <C>
01/31/96 10,000 10,000
02/28/96 10,150 10,312
03/31/96 10,490 10,522
04/30/96 11,550 11,084
05/31/96 12,350 11,521
06/30/96 12,030 11,048
07/31/96 11,220 10,083
08/31/96 11,910 10,668
09/30/96 12,183 11,085
10/31/96 12,162 10,914
11/30/96 12,024 11,364
12/31/96 12,501 11,662
01/30/97 12,606 11,895
02/28/97 12,342 11,606
03/31/97 11,918 11,058
04/30/97 11,675 11,089
05/31/97 12,786 12,324
06/30/97 13,464 12,852
07/31/97 14,385 13,452
08/31/97 14,670 13,756
09/30/97 16,121 14,760
10/30/97 15,538 14,103
11/30/97 15,443 14,007
12/31/97 15,423 14,259
01/31/98 15,325 14,042
02/28/98 16,886 15,095
03/31/98 18,458 15,729
04/30/98 19,119 15,815
05/31/98 18,078 14,967
06/30/98 17,677 15,010
07/31/98 15,640 13,784
08/31/98 11,120 11,112
09/30/98 11,673 11,972
10/31/98 11,413 12,463
11/30/98 11,586 13,121
12/31/98 12,096 13,940
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical Investment into a relevant market index. The index is
unmanaged. Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 37 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE SMALL COMPANY STOCK FUND MANAGER
and or beaten without justification. Tiny, cheap Styling Technology was one such
company. It declined 50% in the fourth quarter in a rapidly recovering market.
Styling's business is healthy and it remains the only consolidator in the salon
products industry. At quarter end, the stock was trading at a price to earnings
ratio of only 5.7 times its 1999 consensus earnings estimate.
Regarding market capitalization, a study of the Russell 2000 Index released
by the Frank Russell Company examined price performance by market cap decile.
Returns consistently worsened as stocks got smaller, from the largest 10% to the
smallest 10% of the Index. The Fund's average market cap is well below the
average market cap of the Russell 2000 Index, and thus the Fund's holdings
suffered for their size.
The smallest companies are out of favor because of their perceived
illiquidity. Investors are currently paying a premium for size and trading ease
as is evidenced by the outperformance of larger stocks, not just within the
Russell 2000, but between the Russell 2000 and the S&P 500.
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Litchfield Financial Corp. ........................................ 5.4%
(Financial Services)
Equitrac Corp. ..................................................... 5.1
(Computer System Solutions)
Hooper Holmes, Inc. ................................................ 4.3
(Medical Insurance Underwriter)
Vallen Corp. ....................................................... 4.2
(Safety Products)
Emmis Communication Corp. (Class A) ................................. 4.0
(Radio Stations)
Landauer, Inc. ..................................................... 3.8
(Radiation Monitoring Services)
Ingles Markets, Inc. ............................................... 3.4
(Supermarket Chain)
MICROS Systems, Inc. ............................................... 3.3
(Specialty Software Company)
Zindart Limited (ADR) ............................................... 3.2
(Manufacturer)
Craig Corp. (Class A) ............................................... 3.2
(Movie Theaters)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(July to Dec.) COST (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Motocar Parts & Accessories, Inc. .................................. $1,282
Landauer, Inc. ...................................................... 1,169
Timberline Software Corp. ........................................... 1,126
Hooper Holmes, Inc. ................................................. 1,073
Emmis Communication Corp. (Class A) .................................. 1,073
<CAPTION>
TOP FIVE SALES PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
*Mylan Laboratories, Inc. .......................................... $2,102
*Ovid Technologies, Inc. ............................................ 1,989
*Seattle FilmWorks, Inc. ............................................ 1,107
*Chart Industries, Inc. ............................................. 1,056
*SPSS, Inc. ........................................................... 984
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
Financial (Diversified) ................................................ 11%
Health Care (Medical Products & Supplies) ............................... 10
Computers (Hardware) .................................................... 10
Manufacturing (Diversified) .............................................. 9
Computers (Software) ..................................................... 5
- ----------------------------------------------------------------------------
* Security sold, no longer in portfolio.
</TABLE>
- 38 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
(The Russell 2000 returned -3.45% for the year. The S&P 500 gained 28.58%.)
Unfortunately, the smallest companies are still suffering on lingering liquidity
fears and the perception that they are more vulnerable in slow growth
environments.
Adding insult to the injury of being smaller, the average valuation of the
stocks we held was lower than the index and 1998 was a year in which value
stocks sadly underperformed. (The Russell 2000 Growth Index returned 1.23%,
while the Russell 2000 Value index fell 6.45%.)
At year end, the portfolio's price earnings ratio on forward earnings
estimates was 11 times, as compared to the S&P Small Cap 600 index at 17.6 times
and the S&P 500 at 25 times.
The Fund's PEG ratio (price/ earnings to the companies' forward growth rate)
is 0.50 times. This compares to 0.90 times for the S&P Small Cap 600 and over
5.00 times for the S&P 500.
Given the difficult environment for small cap value, I eliminated positions
in stocks I had less confidence in. This trimmed the number of names owned to 32
and increased the weightings of those positions, although none are egregiously
large. Nine of the top ten holdings earned a positive return in the latest
quarter.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS AS A PERCENT OF NET ASSETS
<S> <C>
(1) Small-Cap:
(a) Large (over $750 million) 0%
(b) Medium ($250 - $750 million) 28%
(c) Small (under $250 million) 60%
(2) Cash and Other 12%
</TABLE>
I held onto companies I believe in and think are bargain values. I remain
confident the value I see will ultimately be perceived by other investors and
reflected in a higher net asset value for the Fund. I will continually evaluate
our holdings and won't sell our small cap value stocks unless I believe the
reasons to own them are no longer valid. What I will do is gradually increase
the market capitalization of the portfolio by adding names at the larger end of
our range.
Greg Eisen
- -------------------------------
Greg Eisen joined SAFECO in 1986. He holds a BA from Rutgers University and is a
certified public accountant and a Chartered Financial Analyst.
- 39 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO SMALL COMPANY STOCK FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMON STOCKS - 84.8%
AEROSPACE/DEFENSE - 3.2%
194,950 *International Aircraft Investors ................... $1,194
BANKS (REGIONAL) - 2.6%
40,300 Cowlitz Bancorp ........................................ 317
49,559 *Hanmi Bank (Los Angeles, CA) .......................... 657
BROADCASTING (TELEVISION, RADIO & CABLE) - 4.0%
34,600 *Emmis Communications Corp. (Class A) ................ 1,501
COMMUNICATIONS EQUIPMENT - 3.1%
53,950 *World Access, Inc. ................................. 1,153
COMPUTERS (HARDWARE) - 9.9%
99,600 *Equitrac Corp. ..................................... 1,892
37,600 *MICROS Systems, Inc. ............................... 1,236
42,600 *Optimal Robotics Corp. ............................... 596
COMPUTERS (SOFTWARE & SERVICES) - 5.4%
65,850 *Platinum Software Corp. .............................. 844
85,000 Timberline Software Corp. ........................... 1,169
ENTERTAINMENT - 0.2%
9,400 Craig Corp. ............................................ 76
FINANCIAL (DIVERSIFIED) - 10.5%
51,000 *Hawthorne Financial Corp. ............................ 816
106,675 *Litchfield Financial Corp. ......................... 2,027
90,400 *Ragen Mackenzie Group, Inc. ........................ 1,079
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) - 10.3%
55,000 Hooper Holmes, Inc. ................................. 1,595
500,000 *InnerDyne, Inc. ...................................... 688
77,800 *Vallen Corp. ....................................... 1,556
HEALTH CARE (SPECIALIZED SERVICES) - 1.6%
245,000 *Pentegra Dental Group, Inc. .......................... 612
INSURANCE (PROPERTY-CASUALTY) - 2.5%
95,900 *American Safety Insurance Group, Ltd. ................ 923
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
MANUFACTURING (DIVERSIFIED) - 9.1%
96,500 *Lancer Corp. ..................................... $ 1,061
98,000 *Motorcar Parts & Accessories, Inc. ................. 1,121
168,600 *Zindart Limited (ADR) ............................... 1,212
PERSONAL CARE - 4.3%
83,000 *French Fragrances, Inc. .............................. 602
107,100 *Styling Technology Corp. ............................. 991
RETAIL (FOOD CHAINS) - 3.4%
115,000 Ingles Markets, Inc. ................................ 1,258
RETAIL (SPECIALTY) - 1.6%
35,900 *Cole National Corp.
(Class A) .............................................. 615
RETAIL (SPECIALTY-APPAREL) - 3.5%
40,700 *Stage Stores, Inc. ................................... 382
31,000 *Wet Seal, Inc. (Class A) .............................. 936
SERVICES (COMMERCIAL & CONSUMER) - 4.6%
119,515 *Monro Muffler Brake, Inc. ............................ 866
38,900 *StaffMark, Inc. ...................................... 870
TEXTILES (HOME FURNISHINGS) - 1.2%
265,400 *Krause's Furniture, Inc. ............................. 448
WASTE MANAGEMENT - 3.8%
44,000 Landauer, Inc. ...................................... 1,424
-----
TOTAL COMMON STOCKS .................................................. 31,717
-----
PREFERRED STOCK - 3.2%
ENTERTAINMENT - 3.2%
152,500 *Craig Corp. (Class A) ............................... 1,201
-----
TOTAL PREFERRED STOCK ................................................. 1,201
-----
TOTAL INVESTMENTS - 88.0% ............................................ 32,918
Other Assets, less Liabilities ........................................ 4,498
-----
NET ASSETS .......................................................... $37,416
-----
-----
- -----------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
- 40 -
<PAGE>
REPORT FROM THE FUND MANAGERS
SAFECO U.S. VALUE FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
During the fourth quarter, the U.S. Value Fund returned 16.27%, virtually
matching the Russell 1000 Value Index's return of 16.60%, but underperforming
the S&P 500's 21.28%. Returning 12.61% for the year, the Fund underperformed the
15.61%, Lipper, Inc.'s average for growth & income funds, and the S&P 500's
28.58%.
The Fund lagged because low-priced stocks lagged high-priced ones, and as
value managers, we select from stocks that we have identified as undervalued.
Unfortunately, in the last several years, stocks with the lowest valuations have
had the worst performances. [PHOTO OF REX BENTLEY]
For example, in 1998 the difference in the returns of large capitalization
growth stocks and large capitalization value stocks was over 23%: The Russell
1000 Value Index returned 13.21% for 1998, while the Russell 1000 Growth Index
delivered 37.41%. This is by far the largest divergence between the two indices
in their 20-year history. The next largest spread was 16.6% in 1991, and the
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
<S> <C>
1 Year 12.61%
Since Inception* 18.29%
</TABLE>
* Graph and average annual return comparison begins April 30, 1997, inception
date of the fund.
<TABLE>
<CAPTION>
U.S. VALUE S&P 500
FUND INDEX
<S> <C> <C>
04/30/97 10,000 10,000
05/31/97 10,670 10,608
06/30/97 11,053 11,083
07/31/97 11,915 11,965
08/31/97 11,283 11,295
09/30/97 11,669 11,914
10/30/97 11,307 11,516
11/30/97 11,599 12,049
12/31/97 11,749 12,256
01/31/98 11,760 12,391
02/28/98 12,621 13,284
03/31/98 13,095 13,964
04/30/98 12,905 14,104
05/31/98 12,631 13,862
06/30/98 12,615 14,425
07/31/98 12,151 14,272
08/31/98 10,662 12,211
09/30/98 11,380 12,993
10/31/98 12,374 14,049
11/30/98 12,999 14,900
12/31/98 13,231 15,758
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical investment into a relevant market index. The index is
unmanaged. Past performance is not predictive of future performance.
Investment return and principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 41 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE U.S. VALUE FUND MANAGERS
average annual spread between the Russell 1000 Growth Index and the Russell 1000
Value Index, over 20 years, is 8.7%.
The following table further illustrates the divergence of cheap and expensive
stocks. It shows returns for the S&P 500 broken out by price earnings ratios
(P/E); the most-often used valuation for stocks:
<TABLE>
<CAPTION>
S&P RETURNS BY P/E
PRICE/EARNINGS 4TH QUARTER 1998
RATIO RETURN RETURN
<S> <C> <C>
Highest quintile 33.8% 46.6%
Second quintile 25.2% 29.2%
Third quintile 20.1% 7.6%
Fourth quintile 14.4% (0.1%)
Fifth quintile 13.4% (17.1%)
</TABLE>
[PHOTO OF LYNETTE D. SAGVOLD]
The Value Fund's underformance versus the value indices was primarily due to
our relative underweighting in financial services and consumer cyclicals. We
have increased the Fund's weighting in financials over the past few quarters, as
valuations became more attractive. We remain underweighted in financial services
relative to the value indices and overweighted relative to the S&P 500.
Our strategy in managing the Fund and our belief in value-style investing
remains unchanged. We will continue to buy stocks with
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP TEN HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Mobil Corp. ....................................................... 3.4%
(Oil/Gas Exploration & Production)
GTE Corp. .......................................................... 3.2
(Telecommunications)
Merck & Co., Inc. .................................................. 3.1
(Health Care Products)
Kimberly-Clark Corp. ............................................... 3.1
(Manufacturing & Marketing Personal Care Products)
Hewlett-Packard Co. ................................................ 2.8
(Computers)
Chase Manhattan Corp. .............................................. 2.6
(Bank)
Atlantic Richfield Co. ............................................. 2.5
(Oil/Gas Exploration & Production)
Bell Atlantic Corp. ................................................ 2.5
(Telecommunications)
Century Telephone Enterprises, Inc. ................................ 2.5
(Telecommunications)
Johnson & Johnson ................................................... 2.5
(Health Care Products)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(July to Dec.) COST (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Conseco, Inc. ........................................................ $275
Compaq Computer Corp. ................................................. 246
Rubbermaid, Inc. ...................................................... 224
Washington Mutual, Inc. ............................................... 221
Wendy's International, Inc. ........................................... 219
<CAPTION>
TOP FIVE SALES PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
*Anheuser-Busch Co., Inc. ............................................ $287
*Boeing Co. ........................................................... 271
*NationsBank Corp. .................................................... 216
Avon Products, Inc. .................................................. 194
*Burlington Northern Santa Fe Corp. ................................... 185
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
Telephone ............................................................... 8%
Manufacturing (Diversified) .............................................. 8
Oil (Domestic Integrated) ................................................ 6
Computers (Hardware) ..................................................... 5
Health Care (Diversified) ................................................ 5
- ----------------------------------------------------------------------------
* Security sold, no longer in portfolio.
</TABLE>
- 42 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
discount value characteristics that have attractive earnings prospects.
At year-end, the portfolio had a PE based on 1999 projected earnings of 18.2
compared to the S&P's PE of 25.9. The projected earnings growth rate for the
stocks in our portfolio is higher than the projected growth rate for the S&P
500. This strategy has provided superior returns at lower risk levels over time
and we are confident it will again.
During the quarter we sold our position in Anheuser-Busch and replaced it
with PepsiCo, which we felt had a more compelling valuation based on near-term
restructuring opportunities and long-term earnings prospects. As year-end
approached, we sold Boeing to offset some portfolio gains and sold Sequent
Computer and Unisource due to weak near-term fundamentals.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS AS A PERCENT OF NET ASSETS
<S> <C>
(1) Large ($4 Bil. and above) 86%
(2) Medium ($1 Bil. - $4 Bil.) 15%
(3) Small (Less than $1 Bil.) 0%
(4) Cash & Other -1%
</TABLE>
Our outlook for 1999 is mixed. While the U.S. economy continues to do well,
it is likely that corporate earnings growth will slow. This reduced earnings
growth, combined with current high valuations, will probably result in a lower
stock market return than we have recently experienced. We anticipate that a
slowing economy will cause investors to re-evaluate the extreme valuations in
some market sectors. Value oriented equities should once again provide
attractive relative returns.
Rex Bentley
Lynette D. Sagvold
- -------------------------------
Rex Bentley, an MBA from Brigham Young University and Chartered Financial
Analyst, has more than 20 years of investment experience.
Lynette D. Sagvold holds a BA in business administration from the University of
Washington and is a Chartered Financial Analyst. She began her investment career
in 1981 at Kidder Peabody and was a trust officer for Key Trust and First
Interstate before joining SAFECO as a portfolio manager and insurance analyst.
- 43 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO U.S. VALUE FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMON STOCKS - 100.5%
AEROSPACE/DEFENSE - 1.1%
1,400 Lockheed Martin Corp. ................................ $119
BANKS (MAJOR REGIONAL) - 2.2%
7,400 Keycorp ................................................ 237
BANKS (MONEY CENTER) - 2.6%
4,100 Chase Manhattan Corp. ................................. 279
BANKS (REGIONAL) - 2.0%
4,340 Banc One Corp. ........................................ 222
BEVERAGES (NON-ALCOHOLIC) - 1.9%
5,000 PepsiCo, Inc. ......................................... 205
BUILDING MATERIALS - 1.3%
2,400 Armstrong World Industries, Inc. ...................... 145
CHEMICALS - 2.5%
2,000 Du Pont (E.I.) de Nemours & Co. ....................... 106
4,800 Praxair, Inc. ......................................... 169
COMMUNICATIONS EQUIPMENT - 2.1%
3,700 Motorola, Inc. ........................................ 226
COMPUTERS (HARDWARE) - 4.9%
5,300 Compaq Computer Corp. ................................. 222
4,500 Hewlett-Packard Co. ................................... 307
COMPUTERS (PERIPHERALS) - 1.9%
9,600 *Quantum Corp. ........................................ 204
ELECTRIC COMPANIES - 3.7%
7,200 NIPSCO Industries, Inc. ............................... 219
3,700 New Century Energies, Inc. ............................ 180
ELECTRICAL EQUIPMENT - 1.4%
2,966 AMP, Inc. ............................................. 154
ELECTRONICS (SEMICONDUCTORS) - 2.0%
1,800 Intel Corp. ........................................... 213
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
FINANCIAL (DIVERSIFIED) - 4.2%
3,000 American General Corp. ............................... $234
3,000 Federal National Mortgage Association .................. 222
FOODS - 3.7%
6,900 ConAgra, Inc. ......................................... 217
4,400 Dean Foods Co. ........................................ 180
HEALTH CARE (DIVERSIFIED) - 4.5%
3,800 American Home Products Corp. .......................... 214
3,200 Johnson & Johnson ...................................... 268
HEALTH CARE (DRUGS-MAJOR PHARMACEUTICALS) - 3.1%
2,300 Merck & Co., Inc. ..................................... 340
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) - 2.2%
4,300 Beckman Coulter, Inc. ................................. 233
HOUSEHOLD FURNITURE & APPLIANCES - 1.3%
4,600 Rubbermaid, Inc. ...................................... 145
HOUSEHOLD PRODUCTS (NON-DURABLES) - 3.1%
6,200 Kimberly-Clark Corp. .................................. 338
INSURANCE (LIFE-HEALTH) - 1.8%
6,300 Conseco, Inc. ......................................... 193
INSURANCE (MULTI-LINE) - 2.0%
4,000 Hartford Financial Services Group, Inc. ............... 220
MANUFACTURING (DIVERSIFIED) - 7.8%
3,500 AlliedSignal, Inc. .................................... 155
5,800 Corning, Inc. ......................................... 261
7,950 Crane Co. ............................................. 240
2,700 Minnesota Mining & Manufacturing Co. .................. 192
OIL (DOMESTIC INTEGRATED) - 5.9%
4,200 Atlantic Richfield Co. ................................ 274
4,200 Mobil Corp. ........................................... 366
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 44 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO U.S. VALUE FUND
As of December 31, 1998
<TABLE>
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
OIL (INTERNATIONAL INTEGRATED) - 2.3%
4,800 Texaco, Inc. ......................................... $254
OIL & GAS (DRILLING & EQUIPMENT) - 1.1%
4,200 Halliburton Co. ....................................... 124
PAPER & FOREST PRODUCTS - 1.7%
4,000 International Paper Co. ............................... 179
PERSONAL CARE - 1.5%
3,700 Avon Products, Inc. ................................... 164
PUBLISHING (NEWSPAPERS) - 2.4%
7,500 New York Times Co.
(Class A) .............................................. 260
REAL ESTATE INVESTMENT TRUST - 2.5%
2,500 Equity Residential Properties Trust .................... 101
2,900 First Industrial Realty Trust, Inc. .................... 78
4,300 Liberty Property Trust ................................. 106
RESTAURANTS - 2.1%
10,200 Wendy's International, Inc. ........................... 222
RETAIL (DEPARTMENT STORES) - 3.1%
4,100 J.C. Penney Co., Inc. ................................. 192
2,300 May Department Stores Co. ............................. 139
RETAIL (FOOD CHAINS) - 2.0%
6,000 American Stores Co. ................................... 222
<CAPTION>
SHARES VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
SAVINGS & LOANS - 2.3%
6,400 Washington Mutual, Inc. ............................ $ 244
SERVICES (DATA PROCESSING) - 1.0%
1,400 Automatic Data Processing, Inc. ....................... 112
TELEPHONE - 8.2%
4,800 Bell Atlantic Corp. ................................... 273
4,000 Century Telephone Enterprises, Inc. ................... 270
5,100 GTE Corp. ............................................. 344
TOBACCO - 1.1%
2,300 Philip Morris Cos., Inc. .............................. 124
-----
TOTAL COMMON STOCKS .................................................. 10,907
-----
TEMPORARY INVESTMENTS - 2.1%
INVESTMENT COMPANIES:
$232,310 SSgA Prime Money Market Portfolio ...................... 232
-----
TOTAL TEMPORARY INVESTMENTS ............................................. 232
-----
TOTAL INVESTMENTS - 102.6% ........................................... 11,139
Liabilities, less Other Assets ........................................ (287)
-----
NET ASSETS .......................................................... $10,852
-----
-----
- -----------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
- 45 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1998
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO
(In Thousands, Except Per-Share GROWTH EQUITY INCOME
Amounts) FUND FUND FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments, at Cost $ 1,471,884 $ 1,454,198 $ 307,148
----------- ----------- -----------
----------- ----------- -----------
Investments, at Value
Unaffiliated Issuers $ 985,165 $ 2,078,977 $ 399,614
Affiliated Issuers 478,135 -- --
----------- ----------- -----------
Total Investments at Value 1,463,300 2,078,977 399,614
Cash -- 1 --
Receivables
Investment Securities Sold 7,465 -- 278
Trust Shares Sold 6,695 29,684 6,536
Dividends and Interest 691 2,097 1,444
Deferred Organization Expense -- -- --
----------- ----------- -----------
Total Assets 1,478,151 2,110,759 407,872
LIABILITIES
Payables
Investment Securities Purchased -- 9,066 --
Trust Shares Redeemed 7,480 3,477 1,550
Notes Payable to Affiliate 24,955 -- --
Dividends 1,201 4,371 2,471
Investment Advisory Fees 672 927 238
Organization Expense -- -- --
Forward Currency Contracts Open,
Net -- -- --
Other 337 455 85
----------- ----------- -----------
Total Liabilities 34,645 18,296 4,344
----------- ----------- -----------
NET ASSETS $ 1,443,506 $ 2,092,463 $ 403,528
----------- ----------- -----------
----------- ----------- -----------
NO-LOAD CLASS:
Net Assets $ 1,394,225 $ 2,024,877 $ 399,279
Trust Shares Outstanding 61,427 87,101 17,014
----------- ----------- -----------
Net Asset Value, Offering Price,
and Redemption Price Per Share $ 22.70 $ 23.25 $ 23.47
----------- ----------- -----------
----------- ----------- -----------
CLASS A:
Net Assets $ 33,712 $ 50,354 $ 2,073
Trust Shares Outstanding 1,488 2,164 88
----------- ----------- -----------
Net Asset Value and Redemption
Price Per Share $ 22.66 $ 23.27 $ 23.55
----------- ----------- -----------
----------- ----------- -----------
Maximum Offering Price Per Share
(Net Asset Value Plus Sales
Charge of 4.5%) $ 23.73 $ 24.37 $ 24.66
----------- ----------- -----------
----------- ----------- -----------
CLASS B:
Net Assets $ 15,569 $ 17,232 $ 2,176
Trust Shares Outstanding 701 744 92
----------- ----------- -----------
Net Asset Value and Offering Price
Per Share* $ 22.21 $ 23.15 $ 23.57
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
* For Class B shares, the redemption price per share may be lower as a result
of applying contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
- 46 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO SAFECO
NORTHWEST INTERNATIONAL BALANCED SMALL COMPANY U.S. VALUE
FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at Cost $ 47,257 $ 14,431 $ 20,337 $ 38,166 $ 9,880
----------- ----------- --------------- --------------- -----------
----------- ----------- --------------- --------------- -----------
Investments, at Value
Unaffiliated Issuers $ 68,102 $ 19,099 $ 22,277 $ 32,918 $ 11,139
Affiliated Issuers -- -- -- -- --
----------- ----------- --------------- --------------- -----------
Total Investments at Value 68,102 19,099 22,277 32,918 11,139
Cash -- 1,186 -- -- --
Receivables
Investment Securities Sold 912 -- -- 69 --
Trust Shares Sold 90 3,554 16 5,915 6
Dividends and Interest 35 27 140 16 18
Deferred Organization Expense -- 8 8 8 13
----------- ----------- --------------- --------------- -----------
Total Assets 69,139 23,874 22,441 38,926 11,176
LIABILITIES
Payables
Investment Securities Purchased -- -- -- 384 --
Trust Shares Redeemed 116 219 1 784 11
Notes Payable to Affiliate -- -- -- -- --
Dividends 112 -- 324 -- 291
Investment Advisory Fees 46 20 15 26 8
Organization Expense -- 8 8 8 13
Forward Currency Contracts Open,
Net -- 79 -- -- --
Other 460 31 7 308 1
----------- ----------- --------------- --------------- -----------
Total Liabilities 734 357 355 1,510 324
----------- ----------- --------------- --------------- -----------
NET ASSETS $ 68,405 $ 23,517 $ 22,086 $ 37,416 $ 10,852
----------- ----------- --------------- --------------- -----------
----------- ----------- --------------- --------------- -----------
NO-LOAD CLASS:
Net Assets $ 63,594 $ 22,111 $ 19,137 $ 35,162 $ 10,014
Trust Shares Outstanding 3,587 1,682 1,566 3,150 838
----------- ----------- --------------- --------------- -----------
Net Asset Value, Offering Price,
and Redemption Price Per Share $ 17.73 $ 13.14 $ 12.22 $ 11.16 $ 11.95
----------- ----------- --------------- --------------- -----------
----------- ----------- --------------- --------------- -----------
CLASS A:
Net Assets $ 2,208 $ 629 $ 893 $ 1,220 $ 210
Trust Shares Outstanding 126 48 73 110 17
----------- ----------- --------------- --------------- -----------
Net Asset Value and Redemption
Price Per Share $ 17.56 $ 13.13 $ 12.23 $ 11.09 $ 11.93
----------- ----------- --------------- --------------- -----------
----------- ----------- --------------- --------------- -----------
Maximum Offering Price Per Share
(Net Asset Value Plus Sales
Charge of 4.5%) $ 18.39 $ 13.75 $ 12.81 $ 11.61 $ 12.49
----------- ----------- --------------- --------------- -----------
----------- ----------- --------------- --------------- -----------
CLASS B:
Net Assets $ 2,603 $ 777 $ 2,056 $ 1,034 $ 628
Trust Shares Outstanding 150 60 168 96 53
----------- ----------- --------------- --------------- -----------
Net Asset Value and Offering Price
Per Share* $ 17.31 $ 12.99 $ 12.24 $ 10.88 $ 11.91
----------- ----------- --------------- --------------- -----------
----------- ----------- --------------- --------------- -----------
</TABLE>
- --------------------------------------------------------------------------------
* For Class B shares, the redemption price per share may be lower as a result
of applying contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
- 47 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
<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 $32 in the
International Fund) $ 6,085 $ 27,732 $ 11,492
Interest 3,214 2,978 3,098
---------- ---------- ----------
Total Investment Income 9,299 30,710 14,590
EXPENSES
Investment Advisory 6,818 8,913 2,747
Transfer Agent 2,802 3,543 693
Shareholder Service - Class A 45 97 4
- Class B 21 25 4
Distribution - Class B 64 74 11
Legal and Auditing 18 30 20
Custodian 77 87 26
Reports to Shareholders 133 295 56
Trustees 8 13 7
Amortization of Organization
Expenses -- -- --
Other 231 187 45
---------- ---------- ----------
Total Expenses Before
Reimbursement 10,217 13,264 3,613
Expense Reimbursement -- -- --
---------- ---------- ----------
Total Expenses After Reimbursement 10,217 13,264 3,613
---------- ---------- ----------
NET INVESTMENT INCOME (LOSS) (918) 17,446 10,977
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net Realized Gain (Loss) from:
Investments in Unaffiliated
Issuers 45,499 79,369 20,424
Investments in Affiliated Issuers (718) -- --
Foreign Currency Transactions -- -- --
---------- ---------- ----------
Total Net Realized Gain
(Loss) 44,781 79,369 20,424
Net Change in Unrealized
Appreciation (Depreciation) (92,841) 295,679 (10,865)
---------- ---------- ----------
NET GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY (48,060) 375,048 9,559
---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS $ (48,978) $ 392,494 $ 20,536
---------- ---------- ----------
---------- ---------- ----------
- -----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 48 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO SAFECO
NORTHWEST INTERNATIONAL BALANCED SMALL COMPANY U.S. VALUE
FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes
Withheld of $32 in the
International Fund) $ 366 $ 289 $ 247 $ 142 $ 219
Interest 63 23 497 189 13
---------- ------------- -------------- -------------- ----------
Total Investment Income 429 312 744 331 232
EXPENSES
Investment Advisory 519 197 144 360 78
Transfer Agent 194 52 44 122 20
Shareholder Service - Class A 5 1 1 2 --
- Class B 5 2 3 2 1
Distribution - Class B 16 4 8 6 3
Legal and Auditing 15 15 15 15 10
Custodian 7 39 5 9 3
Reports to Shareholders 22 6 5 11 4
Trustees 5 5 5 5 5
Amortization of Organization
Expenses -- 4 4 4 4
Other 14 3 5 15 2
---------- ------------- -------------- -------------- ----------
Total Expenses Before
Reimbursement 802 328 239 551 130
Expense Reimbursement -- (30) -- -- --
---------- ------------- -------------- -------------- ----------
Total Expenses After Reimbursement 802 298 239 551 130
---------- ------------- -------------- -------------- ----------
NET INVESTMENT INCOME (LOSS) (373) 14 505 (220) 102
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net Realized Gain (Loss) from:
Investments in Unaffiliated
Issuers 1,091 (766) 890 (4,172) 464
Investments in Affiliated Issuers -- -- -- -- --
Foreign Currency Transactions -- (144) -- -- --
---------- ------------- -------------- -------------- ----------
Total Net Realized Gain
(Loss) 1,091 (910) 890 (4,172) 464
Net Change in Unrealized
Appreciation (Depreciation) 1,410 3,209 679 (9,513) 598
---------- ------------- -------------- -------------- ----------
NET GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY 2,501 2,299 1,569 (13,685) 1,062
---------- ------------- -------------- -------------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS $ 2,128 $ 2,313 $ 2,074 $ (13,905) $ 1,164
---------- ------------- -------------- -------------- ----------
---------- ------------- -------------- -------------- ----------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 49 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SAFECO GROWTH FUND
------------------------------
YEAR ENDED DECEMBER 31
------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ (918) $ (568)
Net Realized Gain (Loss) on
Investments and Foreign
Currency Transactions 44,781 75,558
Net Change in Unrealized
Appreciation (Depreciation) (92,841) 45,096
------------ ---------------
Net Change in Net Assets
Resulting from Operations (48,978) 120,086
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No Load Class -- --
- Class A -- --
- Class B -- --
Net Realized Gain on Investments
- No Load Class (43,556) (74,345)
- Class A (1,055) (487)
- Class B (497) (167)
------------ ---------------
Total (45,108) (74,999)
NET TRUST SHARE TRANSACTIONS
No-Load Class 846,267 397,579
Class A 32,104 4,018
Class B 15,181 1,293
------------ ---------------
Total 893,552 402,890
------------ ---------------
TOTAL CHANGE IN NET ASSETS 799,466 447,977
NET ASSETS AT BEGINNING OF PERIOD 644,040 196,063
------------ ---------------
NET ASSETS AT END OF PERIOD $ 1,443,506 $ 644,040
------------ ---------------
------------ ---------------
- -------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 50 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO EQUITY FUND SAFECO INCOME FUND SAFECO NORTHWEST FUND
--------------------------- --------------------------- ---------------------------
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
--------------------------- --------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 17,446 $ 15,563 $ 10,977 $ 9,889 $ (373) $ (113)
Net Realized Gain (Loss) on
Investments and Foreign
Currency Transactions 79,369 61,477 20,424 32,768 1,091 6,678
Net Change in Unrealized
Appreciation (Depreciation) 295,679 176,522 (10,865) 39,169 1,410 7,326
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS 392,494 253,562 20,536 81,826 2,128 13,891
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No Load Class (17,149) (15,501) (10,921) (9,866) -- --
- Class A (343) (35) (33) (10) -- --
- Class B -- (2) (22) (7) -- --
Net Realized Gain on Investments
- No Load Class (76,799) (61,064) (20,354) (32,644) (658) (4,031)
- Class A (1,908) (295) (105) (57) (23) (84)
- Class B (656) (139) (110) (65) (28) (76)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL (96,855) (77,036) (31,545) (42,649) (709) (4,191)
NET TRUST SHARE TRANSACTIONS
No-Load Class 246,560 464,573 8,124 72,866 (2,513) 11,654
Class A 37,060 3,709 1,405 524 831 926
Class B 12,194 3,122 1,483 685 1,475 967
------------ ------------ ------------ ------------ ------------ ------------
TOTAL 295,814 471,404 11,012 74,075 (207) 13,547
------------ ------------ ------------ ------------ ------------ ------------
TOTAL CHANGE IN NET ASSETS 591,453 647,930 3 113,252 1,212 23,247
NET ASSETS AT BEGINNING OF PERIOD 1,501,010 853,080 403,525 290,273 67,193 43,946
------------ ------------ ------------ ------------ ------------ ------------
NET ASSETS AT END OF PERIOD $ 2,092,463 $ 1,501,010 $ 403,528 $ 403,525 $ 68,405 $ 67,193
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 51 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SAFECO INTERNATIONAL FUND
------------------------------
YEAR ENDED DECEMBER 31
------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 14 $ 78
Net Realized Gain (Loss) on
Investments and Foreign
Currency Transactions (910) 258
Net Change in Unrealized
Appreciation (Depreciation) 3,209 213
--------------- ------------
Net Change in Net Assets
Resulting from Operations 2,313 549
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No Load Class -- (364)
- Class A -- (5)
- Class B -- (4)
Net Realized Gain on Investments
- No Load Class -- (19)
- Class A -- --
- Class B -- (1)
--------------- ------------
Total -- (393)
NET TRUST SHARE TRANSACTIONS
No-Load Class 5,155 3,437
Class A 273 142
Class B 396 222
--------------- ------------
Total 5,824 3,801
--------------- ------------
TOTAL CHANGE IN NET ASSETS 8,137 3,957
NET ASSETS AT BEGINNING OF PERIOD 15,380 11,423
--------------- ------------
NET ASSETS AT END OF PERIOD $ 23,517 $ 15,380
--------------- ------------
--------------- ------------
- -------------------------------------------------------------------------
</TABLE>
* April 30, 1997 (Commencement of Operations) to December 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
- 52 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO BALANCED FUND SAFECO SMALL COMPANY FUND SAFECO U.S. VALUE FUND
--------------------------- --------------------------- ---------------------------
YEAR ENDED PERIOD ENDED
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 DEC. 31 DEC. 31
--------------------------- --------------------------- ------------ ------------
1998 1997 1998 1997 1998 1997*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 505 $ 328 $ (220) $ (75) $ 102 $ 71
Net Realized Gain (Loss) on
Investments and Foreign
Currency Transactions 890 637 (4,172) 909 464 386
Net Change in Unrealized
Appreciation (Depreciation) 679 760 (9,513) 2,742 598 660
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS 2,074 1,725 (13,905) 3,576 1,164 1,117
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No Load Class (476) (322) -- -- (102) (70)
- Class A (12) (4) -- -- (1) (1)
- Class B (16) (3) -- -- -- --
Net Realized Gain on Investments
- No Load Class (771) (613) -- (540) (428) (372)
- Class A (36) (9) -- (7) (9) (5)
- Class B (83) (15) -- (9) (27) (9)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL (1,394) (966) -- (556) (567) (457)
NET TRUST SHARE TRANSACTIONS
No-Load Class 4,868 4,661 25,617 6,538 377 8,423
Class A 660 86 1,449 100 69 122
Class B 1,675 210 930 260 392 212
------------ ------------ ------------ ------------ ------------ ------------
TOTAL 7,203 4,957 27,996 6,898 838 8,757
------------ ------------ ------------ ------------ ------------ ------------
TOTAL CHANGE IN NET ASSETS 7,883 5,716 14,091 9,918 1,435 9,417
NET ASSETS AT BEGINNING OF PERIOD 14,203 8,487 23,325 13,407 9,417 --
------------ ------------ ------------ ------------ ------------ ------------
NET ASSETS AT END OF PERIOD $ 22,086 $ 14,203 $ 37,416 $ 23,325 $ 10,852 $ 9,417
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* April 30, 1997 (Commencement of Operations) to December 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
- 53 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The SAFECO Common Stock Trust ("Trust") is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Trust consists of the SAFECO Growth Fund, SAFECO Equity
Fund, SAFECO Income Fund, SAFECO Northwest Fund, SAFECO International Stock
Fund, SAFECO Balanced Fund, SAFECO Small Company Stock Fund, and SAFECO U.S.
Value Fund (together "the Funds").
Effective September 30, 1996, the Trust began issuing two new classes of
shares--Class A and Class B shares (collectively, "Advisor Classes"). Unlike the
no-load class of shares (which are sold directly to the shareholder with no
associated sales or distribution charges), these classes of shares are sold by
financial advisors to shareholders and have associated sales and distribution
charges. Each class of shares represents an interest in the net assets of the
fund.
In connection with issuing the new Advisor Classes, the Funds adopted a Plan
of Distribution (the "Plan"). Under the Plan, each Advisor Class pays a service
fee to the distributor, SAFECO Securities, Inc., for selling 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 Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
SECURITY VALUATION. Investments in 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. When valuations are not readily available,
securities are valued at fair value as determined in
- 54 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
good faith by the board of trustees. Temporary investments purchased at par are
valued at cost. All other temporary investments are valued at amortized cost.
Investments in other Mutual Funds are valued at net asset value.
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.
INCOME RECOGNITION. Dividend income less foreign taxes withheld (if any) is
recorded on the ex-dividend date or upon receipt of ex-dividend notification in
the case of certain foreign securities. Interest is accrued on short-term
investments and bonds daily.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. For the Growth, Northwest,
International and Small Company Funds, net investment income (if any) is
declared as a dividend to shareholders as of the last business day (ex-dividend
date) of December. For all other Funds net investment income is distributed as
of the last business day of March, June, September and December. Net realized
gains on investments, if any, are normally distributed to shareholders at the
end of December.
Income dividends and capital gain distributions are determined in accordance
with income tax regulation which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign exchange contracts. Undistributed/ overdistributed net investment income
may include temporary financial reporting and tax basis differences which will
reverse in the subsequent year.
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.
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
- 55 -
<PAGE>
- --------------------------------------------
- --------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 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.
- 56 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
3. INVESTMENT TRANSACTIONS
Following is a summary of investment transactions during the year ended
December 31, 1998:
<TABLE>
<CAPTION>
(In Thousands) PURCHASES* SALES**
- --------------------------------------------------------------------
<S> <C> <C>
Growth Fund $1,555,448 $675,787
Equity Fund 718,354 565,043
Income Fund 191,067 209,246
Northwest Fund 34,006 34,851
International Fund 5,351 4,035
Balanced Fund 20,338 13,781
Small Company Fund 57,692 34,100
U.S. Value Fund 5,957 5,542
- --------------------------------------------------------------------
</TABLE>
* Excludes short-term securities. Purchases in the Balanced Fund include $6,131
of U.S. Government Securities.
** Excludes short-term securities. Sales in the Balanced Fund include $5,045 of
U.S. Government Securities.
- 57 -
<PAGE>
- --------------------------------------------
- --------------------------------------------
NOTES TO FINANCIAL STATEMENTS
4. TRUST SHARE TRANSACTIONS
Following is a summary of transactions in Fund shares and the related amounts
(in thousands):
<TABLE>
<CAPTION>
SAFECO GROWTH FUND
---------------------------------------------------------------------------------------
NO-LOAD CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sales 89,342 28,418 1,454 178 681 51
Reinvestments 1,873 3,187 45 17 22 6
Redemptions (58,229) (14,699) (193) (24) (65) (1)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 32,986 16,906 1,306 171 638 56
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 2,179,487 $ 639,878 $ 35,247 $ 4,224 $ 16,101 $ 1,173
Reinvestments 42,509 71,549 1,009 380 486 142
Redemptions (1,375,729) (313,848) (4,152) (586) (1,406) (22)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 846,267 $ 397,579 $ 32,104 $ 4,018 $ 15,181 $ 1,293
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO EQUITY FUND
---------------------------------------------------------------------------------------
NO-LOAD CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sales 29,980 36,295 2,002 296 604 161
Reinvestments 3,861 3,711 97 16 28 7
Redemptions (23,017) (14,913) (306) (115) (70) (6)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 10,824 25,093 1,793 197 562 162
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 654,422 $ 673,904 $ 41,546 $ 5,615 $ 13,097 $ 3,104
Reinvestments 88,790 72,099 2,241 317 650 131
Redemptions (496,652) (281,430) (6,727) (2,223) (1,553) (113)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 246,560 $ 464,573 $ 37,060 $ 3,709 $ 12,194 $ 3,122
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
- 58 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SAFECO INCOME FUND
---------------------------------------------------------------------------------------
NO-LOAD CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sales 4,553 4,014 66 21 62 26
Reinvestments 1,175 1,604 5 2 5 2
Redemptions (5,541) (2,516) (14) (1) (8) (1)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 187 3,102 57 22 59 27
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 114,102 $ 93,354 $ 1,627 $ 488 $ 1,545 $ 646
Reinvestments 27,902 38,170 119 47 123 56
Redemptions (133,880) (58,658) (341) (11) (185) (17)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 8,124 $ 72,866 $ 1,405 $ 524 $ 1,483 $ 685
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO NORTHWEST FUND
---------------------------------------------------------------------------------------
NO-LOAD CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sales 987 1,783 77 54 106 51
Reinvestments 31 192 2 4 1 4
Redemptions (1,165) (1,322) (31) (6) (28) (1)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE (147) 653 48 52 79 54
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 17,313 $ 30,815 $ 1,349 $ 958 $ 1,882 $ 915
Reinvestments 549 3,321 29 76 27 67
Redemptions (20,375) (22,482) (547) (108) (434) (15)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ (2,513) $ 11,654 $ 831 $ 926 $ 1,475 $ 967
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
- 59 -
<PAGE>
- --------------------------------------------
- --------------------------------------------
NOTES TO FINANCIAL STATEMENTS
4. TRUST SHARE TRANSACTIONS (Continued)
<TABLE>
<CAPTION>
SAFECO INTERNATIONAL FUND
---------------------------------------------------------------------------------------
NO-LOAD CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sales 2,000 899 28 13 40 20
Reinvestments -- 20 -- -- -- --
Redemptions (1,600) (624) (6) (2) (9) (1)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 400 295 22 11 31 19
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 25,289 $ 10,559 $ 343 $ 161 $ 511 $ 232
Reinvestments -- 224 -- -- -- --
Redemptions (20,134) (7,346) (70) (19) (115) (10)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 5,155 $ 3,437 $ 273 $ 142 $ 396 $ 222
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO BALANCED FUND
---------------------------------------------------------------------------------------
NO-LOAD CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sales 1,183 530 72 8 148 17
Reinvestments 66 41 3 1 7 1
Redemptions (860) (165) (20) (2) (16) --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 389 406 55 7 139 18
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 14,335 $ 6,089 $ 862 $ 99 $ 1,783 $ 199
Reinvestments 798 479 41 5 91 11
Redemptions (10,265) (1,907) (243) (18) (199) --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 4,868 $ 4,661 $ 660 $ 86 $ 1,675 $ 210
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 60 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SAFECO SMALL COMPANY FUND
---------------------------------------------------------------------------------------
NO-LOAD CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
FOR THE YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sales 9,098 1,781 108 9 87 18
Reinvestments -- 25 -- -- -- 1
Redemptions (7,540) (1,329) (16) (1) (20) --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 1,558 477 92 8 67 19
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 137,539 $ 24,426 $ 1,634 $ 101 $ 1,156 $ 254
Reinvestments -- 355 -- -- -- 6
Redemptions (111,922) (18,243) (185) (1) (226) --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 25,617 $ 6,538 $ 1,449 $ 100 $ 930 $ 260
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO U.S. VALUE FUND
---------------------------------------------------------------------------------------
NO-LOAD CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31 DEC. 31
------------ ------------ ------------ ------------ ------------ ------------
1998 1997* 1998 1997* 1998 1997*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES:
Sales 225 914 7 13 34 19
Reinvestments 17 14 -- -- 2 1
Redemptions (215) (118) (1) (1) (3) --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 27 810 6 12 33 20
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 2,687 $ 9,623 $ 81 $ 132 $ 410 $ 208
Reinvestments 203 157 4 -- 21 4
Redemptions (2,513) (1,357) (16) (10) (39) --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 377 $ 8,423 $ 69 $ 122 $ 392 $ 212
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* April 30, 1997 (Commencement of Operations) to December 31, 1997.
- 61 -
<PAGE>
- --------------------------------------------
- --------------------------------------------
NOTES TO FINANCIAL STATEMENTS
5. COMPONENTS OF NET ASSETS
At December 31, 1998, the components of net assets were as follows:
<TABLE>
<CAPTION>
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 $ 278,153 $ 664,276 $ 114,367 $ 26,698
Aggregate Gross Unrealized Depreciation
on Investments and Forward Contracts
in Which There is an Excess of
Identified Cost Over Value (286,737) (39,497) (21,901) (5,853)
------------- ----------- ----------- -----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) (8,584) 624,779 92,466 20,845
OVERDISTRIBUTED NET REALIZED GAINS (1,267)* -- (142)* --
ACCUMULATED NET REALIZED (LOSS) ON
INVESTMENTS -- -- -- --
PAID IN CAPITAL (PAR VALUE $.001,
UNLIMITED SHARES AUTHORIZED) 1,453,357 1,467,684 311,204 47,560
------------- ----------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1998 $ 1,443,506 $ 2,092,463 $ 403,528 $ 68,405
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
SMALL
INTERNATIONAL BALANCED COMPANY U.S. VALUE
(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 $ 5,417 $ 2,548 $ 3,420 $ 1,740
Aggregate Gross Unrealized Depreciation
on Investments and Forward Contracts
in Which There is an Excess of
Identified Cost Over Value (828) (608) (8,668) (481)
------------- ----------- ----------- -----------
NET UNREALIZED APPRECIATION
(DEPRECIATION) 4,589 1,940 (5,248) 1,259
OVERDISTRIBUTED NET REALIZED GAINS -- -- -- --
ACCUMULATED NET REALIZED (LOSS) ON
INVESTMENTS (766)** -- (4,172)** --
PAID IN CAPITAL (PAR VALUE $.001,
UNLIMITED SHARES AUTHORIZED) 19,694 20,146 46,836 9,593
------------- ----------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1998 $ 23,517 $ 22,086 $ 37,416 $ 10,852
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
- -------------------------------------------------------------------------------------------------
</TABLE>
* Represents distributions required for tax purposes due to wash sale
deferrals.
** At December 31, 1998, these funds had the following amounts of accumulated
net realized losses on investment transactions that represent capital loss
carryforwards for Federal Income Tax purposes, which expire as follows:
<TABLE>
<CAPTION>
EXPIRATION
AMOUNTS DATES
- ----------------------------------------------------------------
<S> <C> <C>
International Fund $ 766 2006
Small Company Fund 4,172 2006
</TABLE>
- 62 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. 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>
GROWTH, EQUITY AND INCOME FUNDS: NORTHWEST FUND:
First $100 million .75% First $250 million .75%
Next $150 million .65 Next $250 million .65
Next $250 million .55 Next $250 million .55
Over $500 million .45 Over $750 million .45
BALANCED AND U.S. VALUE FUNDS: INTERNATIONAL FUND:
First $250 million .75% First $250 million 1.10%
Next $250 million .65 Next $250 million 1.00
Over $500 million .55 Over $500 million .90
SMALL COMPANY FUND:
First $250 million .85%
Next $250 million .75
Over $500 million .65
</TABLE>
SAFECO Asset Management Company pays sub-advisory fees to Bank of Ireland
Asset Management Company (U.S.) Limited for providing investment research and
advice to the International Fund.
TRANSFER AGENT, SHAREHOLDER SERVICE, AND DISTRIBUTION FEES. SAFECO Services
Corporation receives transfer agent, shareholder service, and distribution fees.
NOTES PAYABLE AND INTEREST EXPENSE. The Funds may borrow money for temporary
purposes from SAFECO Corporation or its affiliates at rates equivalent to
commercial bank interest rates.
LINE OF CREDIT. The Trust, together with all other management investment
companies for which SAFECO Asset Management Company serves as investment
advisor, has a line of credit arrangements with
- 63 -
<PAGE>
- --------------------------------------------
- --------------------------------------------
NOTES TO FINANCIAL STATEMENTS
certain financial institutions. Under these arrangements, $150 million is
available to meet short-term financing needs. No balance was outstanding under
these arrangements at December 31, 1998.
AFFILIATE OWNERSHIP. At December 31, 1998, SAFECO Insurance Company of
America, owned 450,000 shares (12% of outstanding shares) of the Northwest Fund
and SAFECO Asset Management Company owned 688,169 shares (45%) of the
International Fund, 519,268 shares (30%) of the Balanced Fund, and 500,000
shares (56%) of the U.S. Value Fund.
DEFERRED ORGANIZATION EXPENSE. Costs related to the organization of the
International, Balanced, Small Company and U.S. Value Funds have been deferred
and are being amortized to operations over a period of sixty months. These costs
were advanced by SAFECO Asset Management Company and are being reimbursed by the
Funds over the same period.
EXPENSE REIMBURSEMENT. During the year ended December 31, 1998, SAFECO Asset
Management Company voluntarily reimbursed certain expenses of the International
Fund.
DEALER CONCESSIONS. SAFECO Securities, Inc. retained the following amounts in
dealer commissions from sales of Class A Shares during the year ended December
31, 1998:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED
- -----------------------------------------------------
<S> <C>
Growth Fund $ 79,202
Equity Fund 47,689
Income Fund 5,868
Northwest Fund 7,300
International Fund 611
Balanced Fund 4,989
Small Company Fund 2,536
U.S. Value Fund 172
- -----------------------------------------------------
</TABLE>
- 64 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. 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 year
ended December 31, 1998.
<TABLE>
<CAPTION>
MARKET VALUE
(In Thousands) SHARES AT SHARES AT OF AFFILIATES
BEGINNING END OF AT DEC. 31
SECURITY OF PERIOD ADDITIONS REDUCTIONS PERIOD DIVIDENDS 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
American Buildings Co. 360 -- -- 360 -- $ 8,830
American Coin Merchandising, Inc. 465 141 (215) 391 -- 2,297
BNC Mortgage, Inc. -- 484 -- 484 -- 2,539
Concepts Direct, Inc. 348 148 (16) 480 -- 4,016
Creditrust Corp. -- 489 -- 489 -- 12,480
Damark International, Inc. 480 275 -- 755 -- 6,134
Discreet Logic, Inc. -- 1,618 -- 1,618 -- 30,534
Dura Pharmaceuticals, Inc. -- 2,666 (120) 2,546 -- 38,672
Dynamex, Inc. 5 642 (5) 642 -- 2,527
Emmis Communications Corp. (Class
A) -- 1,242 -- 1,242 -- 53,850
Family Golf Centers, Inc. 1,061 1,737 (286) 2,512 -- 49,608
First Commonwealth, Inc. 327 35 (18) 344 -- 4,559
French Fragrances, Inc. -- 895 -- 895 -- 6,489
Funco, Inc. 354 -- -- 354 -- 6,200
Hall, Kinion & Associates, Inc. -- 899 -- 899 -- 6,290
Harold's Stores, Inc. 516 26 -- 542 -- 3,999
Innotrac Corp. -- 676 -- 676 -- 12,252
IntelliQuest Information Group,
Inc. 41 799 -- 840 -- 5,669
Lifeline Systems, Inc. 524 -- (10) 514 -- 12,861
MICROS Systems, Inc. 669 669** (136) 1,202 -- 39,517
NCO Group, Inc. 32 1,491 (67) 1,456 -- 65,507
Nastech Pharmaceutical Co., Inc. 407 202 -- 609 -- 2,360
Open Plan Systems, Inc. 245 -- -- 245 -- 550
*Penederm, Inc. 728 -- (728) -- -- --
Phoenix International Ltd., Inc. 415 208 -- 623 -- 9,182
PolyMedica Industries, Inc. 337 549 -- 886 -- 8,195
Precision Auto Care, Inc. -- 607 -- 607 -- 1,366
Prime Medical Services, Inc. 534 587 -- 1,121 -- 8,200
Recovery Engineering, Inc. -- 427 (85) 342 -- 2,265
*Rent-Way, Inc. 515 139 (547) 108 -- --
Schlotzsky's, Inc. -- 504 (11) 493 -- 4,868
Sirrom Capital Corp. -- 3,731 (8) 3,723 247 18,382
Stage Stores, Inc. 273 1,940 (101) 2,112 -- 19,804
Suburban Lodges of America, Inc. 303 1,226 -- 1,529 -- 12,515
Suburban Ostomy Supply Co., Inc. 690 -- (690) -- -- --
TRM Copy Centers Corp. 186 512 -- 698 -- 5,282
Teardrop Golf Co. -- 414 (100) 314 -- 1,570
TETRA Technologies, Inc. 710 -- -- 710 -- 7,763
Waterside Capital Corp. -- 118 -- 118 -- 1,003
*Weider Nutrition International,
Inc. 728 -- -- 728 109 --
-------------
$478,135
-------------
-------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Company was not an affiliate at the end of the period.
** Represents 2 for 1 stock split.
- 65 -
<PAGE>
- --------------------------------------------
- --------------------------------------------
NOTES TO FINANCIAL STATEMENTS
8. COMMITMENTS.
At December 31, 1998, the International Fund had open forward foreign
currency exchange contracts obligating it to receive or deliver the following
foreign currencies:
<TABLE>
<CAPTION>
(In Thousands)
U.S. DOLLAR UNREALIZED
CURRENCY IN EXCHANGE SETTLEMENT VALUE AS OF APPRECIATION
TO BE DELIVERED FOR DATE DEC. 31, 1998 (DEPRECIATION)
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
224 German Marks $ 137 01/26/99 $ 135 $ 2
25,305 Japanese Yen 196 01/19/99 225 (29)
24,495 Japanese Yen 212 01/20/99 218 (6)
26,115 Japanese Yen 231 01/22/99 232 (1)
27,105 Japanese Yen 225 02/18/99 242 (17)
20,869 Japanese Yen 174 02/26/99 186 (12)
23,809 Japanese Yen 203 03/09/99 213 (10)
46,670 Japanese Yen 402 03/15/99 418 (16)
546 Swiss Francs 409 01/14/99 399 10
---
$ (79)
---
---
- ------------------------------------------------------------------------------------------
</TABLE>
9. NET INVESTMENT LOSS.
The Growth, Northwest, International (when combined with foreign currency
transactions) and Small Company Funds had net investment losses for the year
ended December 31, 1998. For the Growth and Northwest Funds these amounts were
netted against short-term capital gains to reduce the short-term capital gain
distribution. For the International and Small Company Funds these amounts were
recorded as a reduction of paid in capital.
- 66 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO GROWTH FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
--------------------------------------------------------------------------
1998 1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 22.45 $ 16.97 $ 15.45 $ 15.83 $ 17.37 $ 19.20
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.01) (0.02) (0.02) (0.02) 0.07 (0.02)
Net Realized and Unrealized Gain on
Investments 0.99 8.50 1.77 2.24 4.07 0.78
---------- -------- ------------- ---------- ---------- ----------
Total from Investment Operations 0.98 8.48 1.75 2.22 4.14 0.76
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- -- -- (0.07) --
Distributions from Realized Gains (0.73) (3.00) (0.23) (2.60) (5.61) (2.59)
---------- -------- ------------- ---------- ---------- ----------
Total Distributions (0.73) (3.00) (0.23) (2.60) (5.68) (2.59)
---------- -------- ------------- ---------- ---------- ----------
NET ASSET VALUE AT END
OF PERIOD $ 22.70 $ 22.45 $ 16.97 $ 15.45 $ 15.83 $ 17.37
---------- -------- ------------- ---------- ---------- ----------
---------- -------- ------------- ---------- ---------- ----------
TOTAL RETURN 4.37% 49.96% 11.35%* 14.16% 23.93% 3.88%
NET ASSETS AT END OF PERIOD (000'S) $1,394,225 $638,562 $ 195,760 $ 179,574 $ 176,483 $ 156,108
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.77% 0.85% 0.99%** 1.02% 0.98% 0.95%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS (0.06%) (.17%) (.51%)** (.14%) .34% (.12%)
PORTFOLIO TURNOVER RATE 54.58% 82.57% 82.93%** 124.79% 110.44% 71.18%
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
- 67 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO EQUITY FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
----------------------------------------------------------------------------
1998 1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 19.54 $ 16.60 $ 15.85 $ 15.31 $ 13.89 $ 12.54
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.21 0.23 0.06 0.28 0.34 0.23
Net Realized and Unrealized Gain on
Investments 4.64 3.78 1.33 2.42 2.59 1.83
---------- ---------- ------------- ---------- ---------- ----------
Total from Investment Operations 4.85 4.01 1.39 2.70 2.93 2.06
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.21) (0.23) (0.06) (0.28) (0.34) (0.23)
Distributions from Realized Gains (0.93) (0.84) (0.58) (1.88) (1.17) (0.48)
---------- ---------- ------------- ---------- ---------- ----------
Total Distributions (1.14) (1.07) (0.64) (2.16) (1.51) (0.71)
---------- ---------- ------------- ---------- ---------- ----------
NET ASSET VALUE AT END
OF PERIOD $ 23.25 $ 19.54 $ 16.60 $ 15.85 $ 15.31 $ 13.89
---------- ---------- ------------- ---------- ---------- ----------
---------- ---------- ------------- ---------- ---------- ----------
TOTAL RETURN 24.93% 24.21% 8.79%* 18.04% 21.59% 16.51%
NET ASSETS AT END OF PERIOD (000'S) $2,024,877 $1,490,198 $ 849,831 $ 725,780 $ 598,582 $ 412,805
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.74% 0.73% 0.78%** 0.79% 0.84% 0.85%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 0.99% 1.24% 1.48%** 1.74% 2.38% 1.72%
PORTFOLIO TURNOVER RATE 32.94% 34.26% 59.34%** 74.07% 56.14% 33.33%
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
- 68 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INCOME FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-MONTH
FOR THE YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
------------------------------------------------------------------------
1998 1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 23.89 $ 21.13 $ 20.03 $ 19.11 $ 17.25 $ 17.79
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.64 0.65 0.15 0.73 0.82 0.81
Net Realized and Unrealized Gain
(Loss) on Investments 0.86 4.87 1.63 2.84 2.71 (0.30)
-------- -------- ------------- ---------- ---------- ----------
Total from Investment Operations 1.50 5.52 1.78 3.57 3.53 0.51
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.64) (0.65) (0.15) (0.73) (0.82) (0.81)
Distributions from Realized Gains (1.28) (2.11) (0.53) (1.92) (0.85) (0.24)
-------- -------- ------------- ---------- ---------- ----------
Total Distributions (1.92) (2.76) (0.68) (2.65) (1.67) (1.05)
-------- -------- ------------- ---------- ---------- ----------
NET ASSET VALUE AT END
OF PERIOD $ 23.47 $ 23.89 $ 21.13 $ 20.03 $ 19.11 $ 17.25
-------- -------- ------------- ---------- ---------- ----------
-------- -------- ------------- ---------- ---------- ----------
TOTAL RETURN 6.31% 26.43% 8.89%* 18.98% 21.04% 2.98%
NET ASSETS AT END OF PERIOD (000'S) $399,279 $401,985 $ 289,968 $ 260,023 $ 217,870 $ 190,610
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.82% 0.85% 0.89%** 0.86% 0.87% 0.86%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET
ASSETS 2.54% 2.81% 2.89%** 3.56% 4.55% 4.59%
PORTFOLIO TURNOVER RATE 46.14% 52.14% 37.84%** 50.11% 31.12% 19.30%
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
- 69 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO NORTHWEST FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
FOR THE YEAR THREE-MONTH
ENDED PERIOD ENDED FOR THE YEAR ENDED
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
----------------------------------------------------------------------
1998 1997 1996 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 17.31 $ 14.07 $ 13.78 $ 14.41 $ 12.59 $ 12.34
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.09) (0.03) (0.01) 0.02 0.04 0.04
Net Realized and Unrealized Gain on
Investments 0.70 4.41 0.30 1.32 2.35 0.59
------- ------- ------------- ---------- ---------- ----------
Total from Investment Operations 0.61 4.38 0.29 1.34 2.39 0.63
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- -- (0.02) (0.04) (0.04)
Distributions from Realized Gains (0.19) (1.14) -- (1.95) (0.53) (0.34)
------- ------- ------------- ---------- ---------- ----------
Total Distributions (0.19) (1.14) -- (1.97) (0.57) (0.38)
------- ------- ------------- ---------- ---------- ----------
NET ASSET VALUE AT END
OF PERIOD $ 17.73 $ 17.31 $ 14.07 $ 13.78 $ 14.41 $ 12.59
------- ------- ------------- ---------- ---------- ----------
------- ------- ------------- ---------- ---------- ----------
TOTAL RETURN 3.50% 31.12% 2.10%* 9.61% 19.01% 5.19%
NET ASSETS AT END OF PERIOD (000'S) $63,594 $64,635 $ 43,345 $ 43,128 $ 40,140 $ 36,383
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.12% 1.09% 1.25%** 1.07% 1.09% 1.06%
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS (0.49%) (.19%) (.31%)** 0.11% 0.31% 0.33%
PORTFOLIO TURNOVER RATE 50.40% 55.42% 67.32%** 35.69% 19.59% 18.46%
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
- 70 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERNATIONAL FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
JANUARY 31, 1996
(COMMENCEMENT
FOR THE YEAR THREE-MONTH OF OPERATIONS)
ENDED PERIOD ENDED TO
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
--------------------------------------------------
1998 1997 1996 1996
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.50 $ 11.29 $ 10.39 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) 0.01 0.24 -- 0.06
Net Realized and Unrealized Gain on
Investments and Foreign Currency
Transactions 1.63 0.28 0.96 0.39
------- ------- ------------- -------
Total from Investment Operations 1.64 0.52 0.96 0.45
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- (0.29) (0.06) (0.06)
Distributions from Realized
Gains -- (0.02) -- --
------- ------- ------------- -------
Total Distributions -- (0.31) (0.06) (0.06)
------- ------- ------------- -------
NET ASSET VALUE AT END
OF PERIOD $ 13.14 $ 11.50 $ 11.29 $ 10.39
------- ------- ------------- -------
------- ------- ------------- -------
TOTAL RETURN 14.26% 4.55% 9.27%* 4.54%*
NET ASSETS AT END OF PERIOD (000'S) $22,111 $14,754 $ 11,157 $ 8,323
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.62%+ 1.63%+ 1.37%+** 2.36%**
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS 0.14% 0.58% (.19%)** .93%**
PORTFOLIO TURNOVER RATE 25.62% 22.13% 18.51%** 15.73%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would have been 1.79%, 1.89% and 1.68% for
the year or period ended December 31, 1998, 1997, and 1996, respectively.
- 71 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO BALANCED FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
JANUARY 31, 1996
(COMMENCEMENT
FOR THE YEAR THREE-MONTH OF OPERATIONS)
ENDED PERIOD ENDED TO
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
--------------------------------------------------
1998 1997 1996 1996
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.61 $ 10.70 $ 10.38 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.32 0.32 0.08 0.21
Net Realized and Unrealized Gain on
Investments 1.12 1.45 0.45 0.39
------- ------- ------ --------
Total from Investment Operations 1.44 1.77 0.53 0.60
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.32) (0.32) (0.08) (0.21)
Distributions from Realized Gains (0.51) (0.54) (0.13) (0.01)
------- ------- ------ --------
Total Distributions (0.83) (0.86) (0.21) (0.22)
------- ------- ------ --------
NET ASSET VALUE AT END
OF PERIOD $ 12.22 $ 11.61 $ 10.70 $ 10.38
------- ------- ------ --------
------- ------- ------ --------
TOTAL RETURN 12.56% 16.64% 5.11%* 5.99%*
NET ASSETS AT END OF PERIOD (000'S) $19,137 $13,667 $ 8,262 $ 7,632
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.17% 1.23% 1.16%+** 1.32%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 2.74% 2.85% 3.19%** 3.21%**
PORTFOLIO TURNOVER RATE 74.76% 101.22% 36.10%** 143.87%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.52%.
- 72 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO SMALL COMPANY FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
JANUARY 31, 1996
(COMMENCEMENT
FOR THE YEAR THREE-MONTH OF OPERATIONS)
ENDED PERIOD ENDED TO
DECEMBER 31 DECEMBER 31 SEPTEMBER 30
--------------------------------------------------
1998 1997 1996 1996
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 14.23 $ 11.81 $ 11.51 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.06) (0.04) (0.01) (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments (3.01) 2.80 0.31 2.19
-------- ------- ------------ --------
Total from Investment Operations (3.07) 2.76 0.30 2.18
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- -- --
Distributions from Realized Gains -- (0.34) -- (0.67)
-------- ------- ------------ --------
Total Distributions -- (0.34) -- (0.67)
-------- ------- ------------ --------
NET ASSET VALUE AT END
OF PERIOD $ 11.16 $ 14.23 $ 11.81 $ 11.51
-------- ------- ------------ --------
-------- ------- ------------ --------
TOTAL RETURN (21.57%) 23.38% 2.61%* 21.83%*
NET ASSETS AT END OF PERIOD (000'S) $ 35,162 $22,658 $ 13,169 $ 12,552
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.28% 1.33% 1.35%+** 1.49%**
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS (.49%) (.41%) (.44%)** (.24%)**
PORTFOLIO TURNOVER RATE 90.23% 60.81% 73.47%** 91.03%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.58%.
- 73 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO U.S. VALUE FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
APRIL 30, 1997
(COMMENCEMENT
FOR THE OF OPERATIONS)
YEAR ENDED TO
DECEMBER 31 DECEMBER 31
--------------------------------
1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.19 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.12 0.09
Net Realized and Unrealized Gain on
Investments 1.28 1.66
------------- -------
Total from Investment Operations 1.40 1.75
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.12) (0.09)
Distributions from Realized Gains (0.52) (0.47)
------------- -------
Total Distributions (0.64) (0.56)
------------- -------
NET ASSET VALUE AT END
OF PERIOD $ 11.95 $ 11.19
------------- -------
------------- -------
TOTAL RETURN 12.61% 17.50%*
NET ASSETS AT END OF PERIOD (000'S) $ 10,014 $ 9,063
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.19% 1.19%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 1.06% 1.26%**
PORTFOLIO TURNOVER RATE 55.15% 36.37%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
- 74 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of the
SAFECO Common Stock Trust
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments in securities, 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, SAFECO Small Company Stock Fund, and SAFECO U.S.
Value Fund) as of December 31, 1998, 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, 1998, 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.
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 constituting the SAFECO Common Stock Trust at December
31, 1998, 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.
/s/ Ernst & Young LLP
Seattle, Washington
February 5, 1999
- 75 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
EURO CONVERSION
Effective January 1, 1999, eleven European countries converted to a common
currency: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, and Spain. Thus, investments traded in
these markets are now denominated in the new currency--the "Euro". The
combination of these currencies into a single currency presents certain
challenges. However, SAFECO Asset Management and the International Fund's
sub-advisor (Bank of Ireland Asset Management) believe that this economic union
presents greater investment opportunities.
YEAR 2000 READINESS
Preparing for Year 2000 is a high priority for SAFECO Asset Management and
its parent, SAFECO Corporation. A corporate-wide Year 2000 team has been active
for an extended period of time, and has devoted considerable resources to help
achieve Year 2000 readiness. SAFECO Asset Management Company does not anticipate
that Year 2000-related issues will have a material impact on its ability to
continue to provide the Funds with service at current levels. Although SAFECO
Asset Management has taken steps to prepare for Year 2000, it could be
negatively impacted by what its business partners have done or have failed to
do.
Likewise, Year 2000 poses risks to each of the companies in the Funds'
investment portfolio. Thus, portfolio managers consider Year 2000 readiness as
one of the many factors in making an investment decision. Year 2000 also poses
potential risks to worldwide markets and economies.
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES
<PAGE>
SAFECO COMMON STOCK 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
David H. Longhurst
Assistant Controller
INVESTMENT ADVISOR:
SAFECO Asset
Management Company
DISTRIBUTOR:
SAFECO Securities, Inc.
TRANSFER AGENT:
SAFECO Services Corporation
CUSTODIAN:
State Street Bank
Chase Manhattan Bank
(International Fund)
CLIENT SERVICES*:
Monday-Friday,
5:30am-7:00pm, Pacific Time
NATIONWIDE: 1-800-624-5711
DEAF AND HARD OF HEARING
TTY/TDD SERVICE: 1-800-438-8718
*All telephone calls are tape-recorded
for your protection.
FOR 24-HOUR AUTOMATED
PERFORMANCE INFORMATION
AND TRANSACTIONS:
NATIONWIDE: 1-800-835-4391
MAILING ADDRESS:
SAFECO Mutual Funds
P.O. Box 34890
Seattle, WA 98124-1890
INTERNET:
www.safecofunds.com
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