<PAGE>
ANNUAL REPORT
December 31, 1998
SAFECO MUTUAL FUNDS
CLASS A AND CLASS B SHARES
------
<TABLE>
<S> <C>
SAFECO STOCK FUNDS
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
SAFECO BOND FUNDS
High-Yield Bond Fund................................................ 46
Intermediate-Term U.S. Treasury Fund................................ 53
Managed Bond Fund................................................... 56
SAFECO TAX-EXEMPT BOND FUNDS
Municipal Bond Fund................................................. 61
California Tax-Free Income Fund..................................... 69
Washington State Municipal Bond Fund................................ 73
SAFECO MONEY MARKET FUND
Money Market Fund................................................... 77
</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 19.58%* for Class A shares and 19.29%* for Class B shares
for the quarter and 4.47%* for Class A shares and 3.38%* for Class B shares 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
[PHOTO OF THOMAS M. MAGUIRE]
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
1 YEAR 5 YEAR 10 YEAR 1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C>
Class A (0.23%) 17.88% 16.08% 4.47% 18.97% 16.62%
Class B (1.62%) 18.33% 16.41% 3.38% 18.53% 16.41%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
GROWTH FUND GROWTH FUND
CLASS A CLASS B S&P 500 INDEX
<S> <C> <C> <C>
12/31/88 9,550 10,000 10,000
01/31/89 9,817 10,279 10,732
02/28/89 9,753 10,213 10,465
03/31/89 10,064 10,538 10,709
04/30/89 10,474 10,967 11,264
05/31/89 10,915 11,429 11,721
06/30/89 10,705 11,211 11,654
07/31/89 11,182 11,710 12,706
08/31/89 11,517 12,060 12,955
09/30/89 11,754 12,307 12,902
10/31/89 11,310 11,843 12,603
11/30/89 11,275 11,807 12,860
12/31/89 11,383 11,919 13,168
01/31/90 10,279 10,764 12,285
02/28/90 10,560 11,058 12,443
03/31/90 11,197 11,725 12,773
04/30/90 11,245 11,775 12,454
05/31/90 12,398 12,981 13,668
06/30/90 12,665 13,262 13,575
07/31/90 12,211 12,787 13,532
08/31/90 10,105 10,581 12,308
09/30/90 8,972 9,395 11,709
10/31/90 8,368 8,763 11,659
11/30/90 8,988 9,411 12,412
12/31/90 9,680 10,136 12,758
01/31/91 10,646 11,148 13,314
02/28/91 12,113 12,684 14,266
03/31/91 12,706 13,304 14,611
04/30/91 13,318 13,946 14,647
05/31/91 14,197 14,866 15,279
06/30/91 13,350 13,980 14,579
07/31/91 14,601 15,288 15,259
08/31/91 15,180 15,896 15,621
09/30/91 15,272 15,992 15,360
10/31/91 15,732 16,473 15,565
11/30/91 14,404 15,083 14,938
12/31/91 15,743 16,485 16,647
01/31/92 16,895 17,691 16,337
02/28/92 16,775 17,565 16,550
03/31/92 15,528 16,260 16,227
04/30/92 14,565 15,251 16,704
05/31/92 14,204 14,873 16,786
06/30/92 13,112 13,730 16,536
07/31/92 13,662 14,305 17,212
08/31/92 12,889 13,495 16,859
09/30/92 12,549 13,141 17,058
10/31/92 13,078 13,695 17,117
11/30/92 14,730 15,424 17,698
12/31/92 15,260 15,979 17,915
01/31/93 15,897 16,646 18,065
02/28/93 14,838 15,537 18,311
03/31/93 15,421 16,148 18,697
04/30/93 14,469 15,151 18,245
05/31/93 15,215 15,932 18,732
06/30/93 15,690 16,430 18,787
07/31/93 15,637 16,373 18,711
08/31/93 16,642 17,426 19,419
09/30/93 17,372 18,190 19,270
10/31/93 17,815 18,655 19,669
11/30/93 17,064 17,868 19,482
12/31/93 18,646 19,524 19,718
01/31/94 19,649 20,576 20,388
02/28/94 18,710 19,593 19,836
03/31/94 17,772 18,609 18,973
04/30/94 18,246 19,105 19,216
05/31/94 18,413 19,281 19,529
06/30/94 17,046 17,850 19,051
07/31/94 17,428 18,249 19,676
08/31/94 18,516 19,388 20,480
09/30/94 18,046 18,897 19,981
10/31/94 18,306 19,168 20,428
11/30/94 17,807 18,646 19,685
12/31/94 18,343 19,207 19,976
01/31/95 18,061 18,912 20,493
02/28/95 19,054 19,952 21,290
03/31/95 18,981 19,875 21,918
04/30/95 19,075 19,973 22,563
05/31/95 19,837 20,772 23,479
06/30/95 21,039 22,030 24,024
07/31/95 21,781 22,808 24,819
08/31/95 21,708 22,731 24,881
09/30/95 22,364 23,418 25,931
10/31/95 22,265 23,315 25,837
11/30/95 22,492 23,552 26,969
12/31/95 23,132 24,222 27,490
01/31/96 23,988 25,118 28,424
02/28/96 24,888 26,060 28,689
03/31/96 24,508 25,662 28,964
04/30/96 25,550 26,755 29,391
05/31/96 26,635 27,891 30,147
06/30/96 25,479 26,679 30,262
07/31/96 22,966 24,048 28,926
08/31/96 24,336 25,483 29,537
09/30/96 25,532 26,735 31,198
10/31/96 26,077 27,289 32,058
11/30/96 27,085 28,327 34,479
12/31/96 28,429 29,717 33,796
01/31/97 30,858 32,242 35,905
02/28/97 30,037 31,366 36,188
03/31/97 28,964 30,225 34,705
04/30/97 27,608 28,805 36,773
05/31/97 31,796 33,154 39,009
06/30/97 34,427 35,874 40,756
07/31/97 36,436 37,943 43,999
08/31/97 37,727 39,259 41,536
09/30/97 40,758 42,382 43,810
10/30/97 39,988 41,575 42,349
11/30/97 41,731 43,346 44,308
12/31/97 42,533 44,187 45,068
01/31/98 43,141 44,745 45,566
02/28/98 47,472 49,185 48,850
03/31/98 50,397 52,172 51,350
04/30/98 52,316 54,144 51,866
05/31/98 49,847 51,555 50,976
06/30/98 49,808 51,475 53,046
07/31/98 47,320 48,827 52,482
08/31/98 35,827 36,958 44,902
09/30/98 37,157 38,293 47,779
10/31/98 40,121 41,280 51,662
11/30/98 42,172 43,350 54,792
12/31/98 44,433 45,680 57,947
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 2 -
<PAGE>
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- ------------------------------------------------------------------
22.86% for the year, as mentioned by Lipper, Inc.
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, 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.
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>
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- --------------------------------------------------------------------------------
REPORT FROM THE GROWTH FUND MANAGER
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 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS
AS A PERCENT OF NET ASSETS
COMMON STOCKS
<S> <C>
Large: ($4 Bil. and above) 21%
Medium: ($1 Bil. - $4 Bil.) 15%
Small: (Less than $1 Bil.) 65%
Corporate Bonds: 0%
Cash & Other: -1%
</TABLE>
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.
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
- 4 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
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.
- 5 -
<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 Lipper, Inc. peer group for the year and quarter
ended December 31, 1998. The Fund was up 24.77%* for Class A shares and 23.16%*
for Class B shares, for the year. For the fourth quarter, the Fund returned
18.72%* for Class A shares and 18.38%* for Class B shares, 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
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
1 YEAR 5 YEAR 10 YEAR 1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C>
Class A 19.16% 20.44% 19.13% 24.77% 21.55% 19.68%
Class B 18.16% 20.87% 19.43% 23.16% 21.05% 19.43%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
EQUITY FUND EQUITY FUND S&P 500
CLASS A CLASS B INDEX
<S> <C> <C> <C>
12/31/88 9,550 10,000 10,000
01/31/89 10,198 10,678 10,732
02/28/89 10,030 10,503 10,465
03/31/89 10,210 10,691 10,709
04/30/89 10,837 11,348 11,264
05/31/89 11,272 11,803 11,721
06/30/89 11,237 11,766 11,654
07/31/89 12,237 12,814 12,706
08/31/89 12,433 13,019 12,955
09/30/89 12,389 12,974 12,902
10/31/89 12,414 12,998 12,603
11/30/89 12,500 13,088 12,860
12/31/89 12,968 13,579 13,168
01/31/90 11,892 12,452 12,285
02/28/90 12,003 12,569 12,443
03/31/90 12,449 13,035 12,773
04/30/90 12,089 12,658 12,454
05/31/90 13,256 13,881 13,668
06/30/90 13,234 13,858 13,575
07/31/90 12,997 13,611 13,532
08/31/90 11,626 12,173 12,308
09/30/90 11,059 11,581 11,709
10/31/90 10,823 11,334 11,659
11/30/90 11,414 11,951 12,412
12/31/90 11,857 12,416 12,758
01/31/91 12,465 13,052 13,314
02/28/91 13,206 13,828 14,266
03/31/91 13,578 14,218 14,611
04/30/91 13,856 14,509 14,647
05/31/91 14,414 15,093 15,279
06/30/91 13,488 14,123 14,579
07/31/91 14,393 15,070 15,259
08/31/91 14,619 15,307 15,621
09/30/91 14,420 15,100 15,360
10/31/91 14,657 15,347 15,565
11/30/91 13,740 14,387 14,938
12/31/91 15,166 15,881 16,647
01/31/92 16,069 16,825 16,337
02/28/92 16,340 17,111 16,550
03/31/92 15,606 16,341 16,227
04/30/92 15,735 16,477 16,704
05/31/92 15,591 16,326 16,786
06/30/92 14,466 15,147 16,536
07/31/92 15,057 15,766 17,212
08/31/92 14,437 15,118 16,859
09/30/92 14,479 15,161 17,058
10/31/92 15,178 15,893 17,117
11/30/92 16,181 16,943 17,698
12/31/92 16,572 17,352 17,915
01/31/93 17,120 17,927 18,065
02/28/93 17,135 17,943 18,311
03/31/93 18,056 18,907 18,697
04/30/93 17,643 18,475 18,245
05/31/93 19,096 19,995 18,732
06/30/93 19,174 20,077 18,787
07/31/93 18,913 19,804 18,711
08/31/93 19,972 20,913 19,419
09/30/93 20,527 21,495 19,270
10/31/93 21,068 22,060 19,669
11/30/93 21,183 22,181 19,482
12/31/93 21,694 22,716 19,718
01/31/94 22,993 24,077 20,388
02/28/94 22,418 23,474 19,836
03/31/94 21,557 22,573 18,973
04/30/94 22,251 23,299 19,216
05/31/94 22,895 23,973 19,529
06/30/94 22,071 23,110 19,051
07/31/94 22,635 23,701 19,676
08/31/94 24,012 25,144 20,480
09/30/94 23,917 25,044 19,981
10/31/94 24,365 25,513 20,428
11/30/94 23,883 25,009 19,685
12/31/94 23,849 24,972 19,976
01/31/95 24,023 25,155 20,493
02/28/95 24,650 25,812 21,290
03/31/95 24,851 26,022 21,918
04/30/95 25,518 26,719 22,563
05/31/95 26,166 27,399 23,479
06/30/95 26,815 28,078 24,024
07/31/95 27,239 28,522 24,819
08/31/95 27,997 29,316 24,881
09/30/95 29,080 30,451 25,931
10/31/95 28,720 30,072 25,837
11/30/95 29,650 31,047 26,969
12/31/95 29,872 31,280 27,490
01/31/96 30,672 32,116 28,424
02/28/96 30,944 32,402 28,689
03/31/96 31,261 32,735 28,964
04/30/96 31,927 33,432 29,391
05/31/96 32,670 34,210 30,147
06/30/96 33,275 34,843 30,262
07/31/96 31,998 33,506 28,926
08/31/96 32,332 33,855 29,537
09/30/96 34,326 35,943 31,198
10/31/96 35,430 37,054 32,058
11/30/96 38,094 39,820 34,479
12/31/96 37,340 39,000 33,796
01/31/97 39,475 41,232 35,905
02/28/97 39,632 41,373 36,188
03/31/97 38,030 39,670 34,705
04/30/97 39,111 40,774 36,773
05/31/97 41,700 43,453 39,009
06/30/97 43,357 45,183 40,756
07/31/97 46,292 48,216 43,999
08/31/97 43,854 45,677 41,536
09/30/97 45,418 47,289 43,810
10/30/97 43,949 45,714 42,349
11/30/97 45,351 47,148 44,308
12/31/97 46,137 47,942 45,068
01/31/98 46,821 48,507 45,566
02/28/98 50,550 52,308 48,850
03/31/98 52,247 54,000 51,350
04/30/98 52,317 54,049 51,866
05/31/98 51,348 52,970 50,976
06/30/98 52,662 54,295 53,046
07/31/98 52,023 53,583 52,482
08/31/98 45,295 46,618 44,902
09/30/98 48,491 49,881 47,779
10/31/98 52,812 54,246 51,662
11/30/98 56,160 57,630 54,792
12/31/98 57,566 59,047 57,947
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. 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
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%.
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
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>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
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.
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
COMMON STOCKS
<S> <C>
Large: ($4 Bil. and above) 94%
Medium: ($1 Bil. - $4 Bil.) 1%
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
- 11 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE EQUITY FUND MANAGER
Washington, and is a Chartered Financial Analyst.
- 12 -
<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 with 14.35%* for Class A shares
and 14.13%* for Class B shares, compared to 13.35% for 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 5.38%* for Class A shares and 5.03%* for Class B shares, 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
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
1 YEAR 5 YEAR 10 YEAR 1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C>
Class A 0.84% 15.20% 12.81% 5.38% 16.27% 13.33%
Class B 0.03% 15.77% 13.20% 5.03% 15.99% 13.20%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
INCOME FUND INCOME FUND S&P 500
CLASS A CLASS B INDEX
<S> <C> <C> <C>
12/31/88 9,550 10,000 10,000
01/31/89 9,980 10,450 10,732
02/28/89 9,845 10,309 10,465
03/31/89 10,022 10,494 10,709
04/30/89 10,403 10,894 11,264
05/31/89 10,682 11,185 11,721
06/30/89 10,728 11,234 11,654
07/31/89 11,376 11,912 12,706
08/31/89 11,562 12,107 12,955
09/30/89 11,471 12,011 12,902
10/31/89 11,038 11,558 12,603
11/30/89 11,164 11,690 12,860
12/31/89 11,385 11,922 13,168
01/31/90 10,810 11,319 12,285
02/28/90 10,860 11,372 12,443
03/31/90 10,942 11,457 12,773
04/30/90 10,531 11,028 12,454
05/31/90 11,086 11,608 13,668
06/30/90 11,041 11,562 13,575
07/31/90 10,844 11,355 13,532
08/31/90 10,041 10,514 12,308
09/30/90 9,628 10,082 11,709
10/31/90 9,397 9,839 11,659
11/30/90 9,972 10,442 12,412
12/31/90 10,161 10,640 12,758
01/31/91 10,556 11,053 13,314
02/28/91 11,164 11,690 14,266
03/31/91 11,333 11,867 14,611
04/30/91 11,457 11,996 14,647
05/31/91 11,803 12,359 15,279
06/30/91 11,506 12,048 14,579
07/31/91 11,833 12,391 15,259
08/31/91 12,192 12,766 15,621
09/30/91 12,174 12,746 15,360
10/31/91 12,300 12,880 15,565
11/30/91 11,793 12,348 14,938
12/31/91 12,524 13,114 16,647
01/31/92 12,621 13,215 16,337
02/28/92 12,661 13,257 16,550
03/31/92 12,539 13,129 16,227
04/30/92 12,905 13,512 16,704
05/31/92 13,026 13,640 16,786
06/30/92 13,074 13,690 16,536
07/31/92 13,559 14,199 17,212
08/31/92 13,460 14,095 16,859
09/30/92 13,604 14,245 17,058
10/31/92 13,353 13,982 17,117
11/30/92 13,696 14,341 17,698
12/31/92 13,961 14,618 17,915
01/31/93 14,265 14,937 18,065
02/28/93 14,535 15,221 18,311
03/31/93 15,028 15,736 18,697
04/30/93 14,823 15,521 18,245
05/31/93 15,020 15,727 18,732
06/30/93 15,097 15,808 18,787
07/31/93 15,020 15,727 18,711
08/31/93 15,513 16,244 19,419
09/30/93 15,556 16,289 19,270
10/31/93 15,827 16,572 19,669
11/30/93 15,635 16,372 19,482
12/31/93 15,712 16,453 19,718
01/31/94 16,226 16,990 20,388
02/28/94 15,863 16,610 19,836
03/31/94 15,309 16,031 18,973
04/30/94 15,488 16,218 19,216
05/31/94 15,497 16,227 19,529
06/30/94 15,270 15,989 19,051
07/31/94 15,740 16,482 19,676
08/31/94 16,239 17,005 20,480
09/30/94 16,019 16,774 19,981
10/31/94 15,991 16,745 20,428
11/30/94 15,425 16,152 19,685
12/31/94 15,540 16,272 19,976
01/31/95 15,935 16,686 20,493
02/28/95 16,433 17,208 21,290
03/31/95 16,900 17,696 21,918
04/30/95 17,260 18,074 22,563
05/31/95 17,764 18,601 23,479
06/30/95 17,984 18,832 24,024
07/31/95 18,685 19,565 24,819
08/31/95 18,819 19,707 24,881
09/30/95 19,390 20,303 25,931
10/31/95 19,177 20,080 25,837
11/30/95 19,847 20,782 26,969
12/31/95 20,258 21,213 27,490
01/31/96 20,907 21,892 28,424
02/28/96 20,958 21,946 28,689
03/31/96 21,207 22,206 28,964
04/30/96 21,289 22,293 29,391
05/31/96 21,994 23,030 30,147
06/30/96 22,270 23,319 30,262
07/31/96 21,643 22,662 28,926
08/31/96 22,049 23,089 29,537
09/30/96 23,069 24,157 31,198
10/31/96 23,910 25,024 32,058
11/30/96 25,177 26,327 34,479
12/31/96 25,112 26,233 33,796
01/31/97 26,109 27,276 35,905
02/28/97 26,144 27,301 36,188
03/31/97 25,162 26,267 34,705
04/30/97 25,521 26,616 36,773
05/31/97 27,347 28,499 39,009
06/30/97 28,475 29,648 40,756
07/31/97 30,011 31,227 43,999
08/31/97 29,543 30,738 41,536
09/30/97 30,867 32,085 43,810
10/30/97 29,830 30,991 42,349
11/30/97 30,903 32,085 44,308
12/31/97 31,679 32,883 45,068
01/31/98 32,062 33,405 45,566
02/28/98 33,855 35,258 48,850
03/31/98 35,244 36,676 51,350
04/30/98 35,508 36,923 51,866
05/31/98 34,728 36,084 50,976
06/30/98 35,411 36,782 53,046
07/31/98 33,882 35,167 52,482
08/31/98 28,685 29,748 44,902
09/30/98 29,192 30,262 47,779
10/31/98 30,930 32,048 51,662
11/30/98 32,615 33,765 54,792
12/31/98 33,382 34,538 57,947
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 14 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
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.
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
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
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 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
COMMON STOCKS
<S> <C>
Large: ($4 Bil. and above) 50%
Medium: ($1 Bil. - $4 Bil.) 13%
Small: (Less than $1 Bil.) 11%
Preferred Stocks: 16%
Corporate Bonds: 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 20.88%* for Class A shares and 20.74%* for
Class B shares. For the year, we eked out 2.87%* for Class A shares and 2.37%*
for Class B shares 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 [PHOTO OF WILLIAM B. WHITLOW, JR.]
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
1 YEAR 5 YEAR 10 YEAR 1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C>
Class A (1.76)% 11.81% 11.41% 2.87% 12.84% 12.06%
Class B (2.63)% 12.29% 11.87% 2.37% 12.54% 11.87%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO WM GROUP
NORTHWEST FUND NORTHWEST FUND S&P 500 NW 50
CLASS A CLASS B INDEX INDEX
<S> <C> <C> <C> <C>
02/28/91 9,550 10,000 10,000 10,000
03/31/91 9,832 10,295 10,242 10,409
04/30/91 10,120 10,596 10,267 10,666
05/31/91 10,465 10,958 10,710 11,305
06/30/91 9,853 10,317 10,220 10,552
07/31/91 10,440 10,932 10,696 11,063
08/31/91 10,873 11,386 10,949 11,510
09/30/91 10,607 11,106 10,766 11,292
10/31/91 10,500 10,995 10,911 11,285
11/30/91 9,853 10,318 10,471 10,836
12/31/91 11,052 11,573 11,669 12,133
01/31/92 11,528 12,072 11,452 12,767
02/28/92 11,898 12,459 11,601 12,958
03/31/92 11,637 12,185 11,375 12,545
04/30/92 11,228 11,757 11,709 11,973
05/31/92 11,344 11,879 11,766 11,865
06/30/92 10,986 11,504 11,591 11,450
07/31/92 11,240 11,770 12,065 11,567
08/31/92 10,938 11,453 11,818 11,250
09/30/92 11,393 11,931 11,957 11,693
10/31/92 11,774 12,329 11,998 12,156
11/30/92 12,272 12,850 12,406 12,701
12/31/92 12,609 13,202 12,558 12,725
01/31/93 12,658 13,255 12,663 12,821
02/28/93 12,037 12,605 12,835 12,420
03/31/93 12,508 13,098 13,106 12,932
04/30/93 11,997 12,563 12,789 12,641
05/31/93 12,258 12,836 13,130 12,953
06/30/93 12,142 12,715 13,169 12,675
07/31/93 12,042 12,610 13,116 12,220
08/31/93 12,383 12,967 13,612 12,721
09/30/93 12,374 12,957 13,508 12,434
10/31/93 12,534 13,125 13,787 12,881
11/30/93 12,584 13,177 13,656 13,158
12/31/93 12,738 13,338 13,821 13,334
01/31/94 12,963 13,574 14,291 13,737
02/28/94 13,290 13,917 13,904 13,941
03/31/94 12,728 13,328 13,299 13,449
04/30/94 12,697 13,295 13,470 13,409
05/31/94 12,892 13,499 13,689 13,611
06/30/94 12,561 13,154 13,354 13,198
07/31/94 12,746 13,347 13,792 13,300
08/31/94 13,320 13,948 14,356 14,068
09/30/94 13,015 13,629 14,005 13,530
10/31/94 12,892 13,499 14,319 13,449
11/30/94 12,572 13,163 13,798 13,209
12/31/94 12,540 13,131 14,002 13,281
01/31/95 12,695 13,293 14,365 13,224
02/28/95 13,016 13,629 14,924 13,668
03/31/95 13,451 14,084 15,364 14,102
04/30/95 13,627 14,269 15,816 14,526
05/31/95 13,834 14,485 16,458 14,528
06/30/95 14,516 15,201 16,840 15,409
07/31/95 15,273 15,992 17,397 15,993
08/31/95 15,408 16,133 17,440 16,299
09/30/95 15,490 16,220 18,176 16,897
10/31/95 15,307 16,029 18,111 16,507
11/30/95 15,275 15,995 18,904 16,753
12/31/95 15,070 15,780 19,269 16,957
01/31/96 15,213 15,930 19,924 17,518
02/28/96 15,677 16,415 20,110 17,921
03/31/96 16,626 17,409 20,303 17,826
04/30/96 17,078 17,882 20,602 18,898
05/31/96 17,365 18,183 21,132 19,204
06/30/96 17,003 17,803 21,213 19,123
07/31/96 16,198 16,960 20,276 18,188
08/31/96 16,715 17,504 20,704 19,088
09/30/96 16,979 17,778 21,868 19,583
10/31/96 16,548 17,314 22,471 19,446
11/30/96 17,274 18,062 24,168 20,852
12/31/96 17,324 18,101 23,689 21,348
01/31/97 18,580 19,404 25,168 22,302
02/28/97 18,580 19,391 25,366 22,719
03/31/97 17,804 18,565 24,326 22,097
04/30/97 18,432 19,211 25,776 23,084
05/31/97 19,652 20,475 27,343 24,975
06/30/97 20,773 21,636 28,568 26,156
07/31/97 22,572 23,481 30,841 28,542
08/31/97 21,968 22,836 29,115 27,620
09/30/97 23,066 23,958 30,709 29,553
10/30/97 21,968 22,823 29,685 27,603
11/30/97 22,917 23,791 31,058 29,281
12/31/97 22,657 23,518 31,591 28,622
01/31/98 22,434 23,285 31,940 28,511
02/28/98 24,720 25,652 34,242 31,422
03/31/98 25,022 25,954 35,994 32,920
04/30/98 25,625 26,574 36,356 32,795
05/31/98 23,747 24,606 35,732 31,211
06/30/98 24,273 25,128 37,183 33,162
07/31/98 22,763 23,559 36,788 31,129
08/31/98 18,231 18,867 31,475 26,432
09/30/98 19,282 19,941 33,491 27,677
10/31/98 20,477 21,165 36,213 30,763
11/30/98 22,210 22,954 38,407 34,279
12/31/98 23,307 24,076 40,619 38,403
</TABLE>
* The Fund's inception was February 7, 1991. Graph and average annual return
comparison begins February 28, 1991.
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 20 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
caused the Fund to underperform as technology carried the region.
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. 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
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
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
15.4% invested outside the Northwest. We are allowed to invest up to 35% of
assets outside the region.
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
COMMON STOCKS
<S> <C>
Large: ($4 Bil. and above) 49%
Medium: ($1 Bil. - $4 Bil.) 4%
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.
- -------------------------------
- 22 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
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.
- 23 -
<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
RETAIL (GENERAL MERCHANDISE) - 4.6%
44,000 *Costco Companies, Inc. ........................... $ 3,176
</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>
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 13.68%* for Class A shares and
12.66%* for Class B shares for the year and 18.93%* for Class A shares and
18.63%* for Class B shares for the quarter. 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.
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
SINCE SINCE
1 YEAR INCEPTION* 1 YEAR INCEPTION*
<S> <C> <C> <C> <C>
Class A 8.56% 9.20% 13.68% 10.94%
Class B 7.66% 9.36% 12.66% 10.22%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
INTERNATIONAL INTERNATIONAL
FUND FUND
CLASS A CLASS B EAFE INDEX
<S> <C> <C> <C>
01/31/96 9,550 10,000 10,000
02/28/96 9,493 9,940 10,034
03/31/96 9,588 10,040 10,247
04/30/96 9,827 10,290 10,545
05/31/96 9,789 10,250 10,351
06/30/96 9,779 10,240 10,409
07/31/96 9,397 9,840 10,105
08/31/96 9,779 10,240 10,127
09/30/96 9,983 10,454 10,396
10/31/96 10,099 10,565 10,290
11/30/96 10,733 11,229 10,699
12/31/96 10,901 11,391 10,561
01/30/97 10,863 11,340 10,192
02/28/97 11,007 11,482 10,358
03/31/97 10,931 11,411 10,396
04/30/97 10,978 11,451 10,451
05/31/97 11,481 11,966 11,131
06/30/97 11,828 12,320 11,731
07/31/97 12,243 12,744 11,907
08/31/97 11,201 11,643 11,004
09/30/97 11,954 12,421 11,607
10/30/97 10,959 11,381 10,700
11/30/97 11,027 11,441 10,577
12/31/97 11,371 11,787 10,656
01/31/98 11,607 12,032 11,130
02/28/98 12,375 12,820 11,829
03/31/98 12,857 13,311 12,179
04/30/98 12,926 13,352 12,261
05/31/98 13,034 13,464 12,187
06/30/98 13,162 13,586 12,265
07/31/98 13,300 13,720 12,375
08/31/98 11,567 11,920 10,827
09/30/98 10,868 11,194 10,480
10/31/98 11,686 12,022 11,557
11/30/98 12,581 12,933 12,135
12/31/98 12,926 13,280 12,599
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. 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
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 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
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>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
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. 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 9.92%* for Class A shares and 9.79%* for
Class B shares, for the fourth quarter. For the year the Fund returned 12.06%*
for Class A shares and 11.30%* for Class B shares. The average balanced fund
returned 11.32% for the fourth quarter and 13.48% for the year.
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
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
SINCE SINCE
1 YEAR INCEPTION* 1 YEAR INCEPTION*
<S> <C> <C> <C> <C>
Class A 7.02% 11.84% 12.06% 13.62%
Class B 6.30% 12.09% 11.30% 12.91%
</TABLE>
<TABLE>
<CAPTION>
60% S&P 500/40%
SAFECO SAFECO LEHMAN BROTHERS
BALANCED FUND BALANCED FUND GOVERNMENT/
CLASS A CLASS B CORPORATE INDEX
<S> <C> <C> <C>
01/31/96 9,550 10,000 10,000
02/28/96 9,502 9,950 9,971
03/31/96 9,566 10,017 9,995
04/30/96 9,624 10,077 10,056
05/31/96 9,758 10,218 10,204
06/30/96 9,879 10,345 10,282
07/31/96 9,656 10,112 10,019
08/31/96 9,783 10,243 10,137
09/30/96 10,122 10,599 10,551
10/31/96 10,326 10,803 10,824
11/30/96 10,765 11,252 11,394
12/31/96 10,635 11,112 11,208
01/30/97 10,953 11,434 11,633
02/28/97 11,042 11,517 11,698
03/31/97 10,654 11,111 11,354
04/30/97 10,895 11,351 11,826
05/31/97 11,346 11,810 12,302
06/30/97 11,636 12,096 12,692
07/31/97 12,302 12,777 13,453
08/31/97 11,828 12,274 12,941
09/30/97 12,148 12,607 13,447
10/30/97 12,017 12,459 13,264
11/30/97 12,220 12,660 13,660
12/31/97 12,366 12,803 13,858
01/31/98 12,451 12,880 14,028
02/28/98 12,996 13,432 14,624
03/31/98 13,284 13,727 15,091
04/30/98 13,210 13,627 15,212
05/31/98 13,081 13,494 15,106
06/30/98 13,119 13,528 15,535
07/31/98 12,829 13,217 15,441
08/31/98 11,967 12,318 14,224
09/30/98 12,607 12,979 14,933
10/31/98 13,267 13,658 15,619
11/30/98 13,679 14,059 16,224
12/31/98 13,857 14,250 16,800
</TABLE>
*Graph and average annual return comparison begins January 31, 1996,
inception date of the fund.
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Funds original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. 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
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
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 SAGVOLD]
[PHOTO OF MICHAEL HUGHES]
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>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
Our strategy in managing the equities in the Fund remains unchanged. We buy
stocks with discount valuation characteristics that have attractive earnings
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
COMMON STOCKS
<S> <C>
Large: ($4 Bil. and above) 54%
Medium: ($1 Bil. - $4 Bil.) 9%
Small: (Less than $1 Bil.) 0%
Corporate Bonds: 12%
Asset Backed Securities: 6%
U.S. Government Securities: 19%
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 3.36%* for Class A shares and
3.23%* for Class B shares while the average small company fund gained 19.12%
according to Lipper, Inc. For the year, the Fund was down 21.96%* for Class A
shares and 22.67%* for Class B shares, versus the peer group average of -0.33%.
[PHOTO OF GREG EISEN]
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED JUNE 30, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
SINCE SINCE
1 YEAR INCEPTION* 1 YEAR INCEPTION*
<S> <C> <C> <C> <C>
Class A -25.47% 4.84% -21.96% 6.51%
Class B -26.54% 4.89% -22.67% 5.82%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
SMALL COMPANY SMALL COMPANY
FUND FUND RUSSELL 2000
CLASS A CLASS B INDEX
<S> <C> <C> <C>
01/31/96 $9,550 $10,000 $10,000
02/28/96 $9,693 $10,150 $10,312
03/31/96 $10,018 $10,490 $10,522
04/30/96 $11,030 $11,550 $11,084
05/31/96 $11,794 $12,350 $11,521
06/30/96 $11,489 $12,030 $11,048
07/31/96 $10,715 $11,220 $10,083
08/31/96 $11,374 $11,910 $10,668
09/30/96 $11,635 $12,183 $11,085
10/31/96 $11,615 $12,151 $10,914
11/30/96 $11,473 $12,003 $11,364
12/31/96 $11,938 $12,479 $11,662
01/30/97 $12,039 $12,575 $11,895
02/28/97 $11,786 $12,299 $11,606
03/31/97 $11,382 $11,876 $11,058
04/30/97 $11,150 $11,611 $11,089
05/31/97 $12,201 $12,712 $12,324
06/30/97 $12,848 $13,368 $12,852
07/31/97 $13,737 $14,279 $13,452
08/31/97 $14,000 $14,554 $13,756
09/30/97 $15,375 $15,972 $14,760
10/30/97 $14,819 $15,380 $14,103
11/30/97 $14,728 $15,284 $14,007
12/31/97 $14,709 $15,254 $14,259
01/31/98 $14,605 $15,134 $14,042
02/28/98 $16,085 $16,652 $15,095
03/31/98 $17,576 $18,181 $15,729
04/30/98 $18,187 $18,810 $15,815
05/31/98 $17,203 $17,769 $14,967
06/30/98 $16,820 $17,368 $15,010
07/31/98 $14,874 $15,340 $13,784
08/31/98 $10,579 $10,895 $11,112
09/30/98 $11,107 $11,427 $11,972
10/31/98 $10,848 $11,156 $12,463
11/30/98 $11,003 $11,307 $13,121
12/31/98 $11,479 $11,795 $13,940
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. 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
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.
While the Fund held strong companies during the quarter, their stocks were
largely ignored 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
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>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
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. (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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTINGS
AS A PERCENT OF NET ASSETS
<S> <C>
Small-Cap:
Large: (over $750 million) 0%
Medium: ($250 - $750 million) 28%
Small: (under $250 million) 60%
Cash and Other: 12%
</TABLE>
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.
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
- -------------------------------
- 39 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE SMALL COMPANY STOCK FUND MANAGER
Greg Eisen joined SAFECO in 1986. He holds a BA from Rutgers University and is a
certified public accountant and a Chartered Financial Analyst.
- 40 -
<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 15.81%* for Class A
shares and 15.84%* for Class B shares, underperforming the Russell 1000 Value
Index's return of 16.60%, and the S&P 500's 21.28%. Returning 11.79%* for Class
A shares and 11.18%* for Class B shares 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]
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
SINCE SINCE
1 YEAR INCEPTION* 1 YEAR INCEPTION*
<S> <C> <C> <C> <C>
Class A 6.76% 14.41% 11.79% 17.62%
Class B 6.18% 14.69% 11.18% 16.87%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
U.S. VALUE U.S. VAULE
FUND FUND
CLASS A CLASS B S&P 500 INDEX
<S> <C> <C> <C>
04/30/97 $9,550 $10,000 $10,000
05/31/97 $10,190 $10,660 $10,608
06/30/97 $10,558 $11,041 $11,083
07/31/97 $11,371 $11,882 $11,965
08/31/97 $10,768 $11,241 $11,295
09/30/97 $11,139 $11,616 $11,914
10/30/97 $10,783 $11,245 $11,516
11/30/97 $11,053 $11,525 $12,049
12/31/97 $11,196 $11,663 $12,256
01/31/98 $11,216 $11,663 $12,391
02/28/98 $12,027 $12,507 $13,284
03/31/98 $12,461 $12,946 $13,964
04/30/98 $12,281 $12,747 $14,104
05/31/98 $12,010 $12,466 $13,862
06/30/98 $11,989 $12,435 $14,425
07/31/98 $11,547 $11,965 $14,272
08/31/98 $10,131 $10,494 $12,211
09/30/98 $10,807 $11,193 $12,993
10/31/98 $11,732 $12,143 $14,049
11/30/98 $12,305 $12,747 $14,900
12/31/98 $12,516 $12,967 $15,758
</TABLE>
*Graph and total return comparison begins April 30, 1997, inception date of
the fund.
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. 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
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
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 SAGVOLD]
The Value Fund's underformance versus the value indices was primarily due to
our relative
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>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
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 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
COMMON STOCKS
<S> <C>
Large: ($4 Bil. and above) 86%
Medium: ($1 Bil. - $4 Bil.) 15%
Small: (Less than $1 Bil.) 0%
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
- 43 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE U.S. VALUE FUND MANAGERS
Interstate before joining SAFECO as a portfolio manager and insurance analyst.
- 44 -
<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>
REPORT FROM THE FUND MANAGER
SAFECO HIGH-YIELD BOND FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The SAFECO High-Yield Bond Fund beat both its benchmark index and peer group
for the quarter and year ended December 31, 1998.
For the quarter, the Fund returned 3.46%* for Class A shares and 3.22%* for
Class B shares. For the year, the Fund returned 4.32%* for Class A shares and
3.39%* for Class B shares. For the quarter and year, the Merrill Lynch
High-Yield Master II Index returned 2.76% and 2.95% respectively, while the
average return on the Lipper, Inc. High Current Yield Funds group was 2.75% and
- -0.44% respectively. [PHOTO OF ROBERT KERN]
The high-yield market came back strongly during the fourth quarter of 1998,
as the "flight-to-quality" trade into U.S. Treasury bonds reversed itself. The
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
1 YEAR 5 YEAR 10 YEAR 1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C>
Class A (0.38)% 6.94% 8.57% 4.32% 7.92% 9.07%
Class B (1.51)% 7.29% 8.90% 3.39% 7.59% 8.90%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO MERRILL LYNCH
HIGH-YIELD HIGH-YIELD HIGH-YIELD
BOND BOND MASTER II
FUND CLASS A FUND CLASS B INDEX
<S> <C> <C> <C>
12/31/88 9,550 10,000 10,000
01/31/89 9,702 10,159 10,163
02/28/89 9,736 10,194 10,224
03/31/89 9,673 10,129 10,184
04/30/89 9,620 10,074 10,188
05/31/89 9,771 10,231 10,380
06/30/89 9,905 10,372 10,538
07/31/89 9,964 10,433 10,581
08/31/89 9,946 10,414 10,630
09/30/89 9,899 10,366 10,518
10/31/89 9,770 10,229 10,257
11/30/89 9,751 10,211 10,272
12/31/89 9,739 10,198 10,231
01/31/90 9,594 10,046 9,954
02/28/90 9,401 9,845 9,804
03/31/90 9,591 10,043 9,989
04/30/90 9,648 10,103 10,051
05/31/90 9,839 10,302 10,219
06/30/90 9,950 10,419 10,475
07/31/90 10,178 10,658 10,738
08/31/90 9,867 10,332 10,247
09/30/90 9,499 9,947 9,826
10/31/90 9,193 9,627 9,538
11/30/90 9,295 9,733 9,638
12/31/90 9,389 9,832 9,785
01/31/91 9,339 9,779 9,985
02/28/91 9,724 10,182 10,851
03/31/91 10,067 10,542 11,388
04/30/91 10,375 10,864 11,782
05/31/91 10,499 10,994 11,828
06/30/91 10,614 11,114 12,096
07/31/91 10,848 11,360 12,421
08/31/91 11,060 11,580 12,707
09/30/91 11,225 11,754 12,886
10/31/91 11,485 12,026 13,324
11/30/91 11,628 12,176 13,467
12/31/91 11,670 12,220 13,617
01/31/92 11,994 12,560 14,077
02/28/92 12,203 12,777 14,433
03/31/92 12,334 12,915 14,636
04/30/92 12,326 12,907 14,712
05/31/92 12,493 13,081 14,929
06/30/92 12,654 13,251 15,101
07/31/92 12,872 13,478 15,395
08/31/92 13,031 13,646 15,591
09/30/92 13,192 13,814 15,756
10/31/92 12,933 13,543 15,554
11/30/92 13,152 13,772 15,792
12/31/92 13,289 13,915 15,993
01/31/93 13,651 14,295 16,374
02/28/93 13,922 14,578 16,666
03/31/93 14,159 14,826 16,950
04/30/93 14,262 14,934 17,066
05/31/93 14,478 15,160 17,288
06/30/93 14,752 15,446 17,610
07/31/93 14,925 15,628 17,787
08/31/93 15,026 15,735 17,950
09/30/93 15,077 15,788 18,030
10/31/93 15,292 16,011 18,372
11/30/93 15,409 16,134 18,468
12/31/93 15,536 16,268 18,662
01/31/94 15,829 16,574 19,066
02/28/94 15,752 16,494 18,933
03/31/94 15,194 15,911 18,322
04/30/94 15,072 15,782 18,094
05/31/94 15,210 15,927 18,054
06/30/94 15,276 15,996 18,136
07/31/94 15,270 15,990 18,256
08/31/94 15,327 16,049 18,391
09/30/94 15,321 16,043 18,387
10/31/94 15,259 15,978 18,435
11/30/94 15,059 15,768 18,277
12/31/94 15,186 15,901 18,469
01/31/95 15,364 16,089 18,729
02/28/95 15,688 16,427 19,329
03/31/95 15,831 16,577 19,590
04/30/95 16,130 16,890 20,097
05/31/95 16,554 17,334 20,717
06/30/95 16,637 17,422 20,856
07/31/95 16,859 17,652 21,128
08/31/95 16,866 17,661 21,239
09/30/95 17,071 17,876 21,491
10/31/95 17,307 18,123 21,667
11/30/95 17,337 18,154 21,882
12/31/95 17,562 18,389 22,248
01/31/96 17,782 18,621 22,620
02/28/96 17,953 18,800 22,689
03/31/96 17,895 18,738 22,596
04/30/96 17,931 18,777 22,628
05/31/96 18,042 18,893 22,791
06/30/96 18,089 18,941 22,893
07/31/96 18,278 19,139 23,032
08/31/96 18,537 19,411 23,319
09/30/96 18,913 19,804 23,861
10/31/96 18,985 19,881 24,068
11/30/96 19,267 20,176 24,552
12/31/96 19,385 20,300 24,756
01/31/97 19,548 20,469 24,942
02/28/97 19,905 20,832 25,326
03/31/97 19,488 20,382 24,976
04/30/97 19,613 20,500 25,296
05/31/97 20,171 21,069 25,829
06/30/97 20,453 21,351 26,228
07/31/97 20,978 21,886 26,923
08/31/97 20,984 21,882 26,891
09/30/97 21,342 22,244 27,375
10/31/97 21,321 22,211 27,515
11/30/97 21,540 22,426 27,772
12/31/97 21,806 22,688 28,039
01/31/98 22,260 23,148 28,486
02/28/98 22,377 23,253 28,602
03/31/98 22,615 23,483 28,873
04/30/98 22,559 23,409 28,997
05/31/98 22,656 23,491 29,171
06/30/98 22,725 23,546 29,322
07/31/98 23,042 23,855 29,509
08/31/98 21,603 22,347 28,019
09/30/98 21,986 22,726 28,092
10/31/98 21,707 22,419 27,492
11/30/98 22,642 23,367 28,919
12/31/98 22,748 23,457 28,867
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 46 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
catalyst for this extraordinary performance was a series of interest rate
easings by the Federal Reserve. Beginning in late September, the Fed eased three
times taking the Fed Funds rate from 5.50% to 4.75% by mid-November. Conspicuous
in this process was the October 15th drop of 25 basis points from 5.25% to 5.00%
which occurred between the Fed's regularly scheduled meetings. This move sent a
signal to the financial markets that the Fed was ready to use monetary policy
proactively to prevent further dislocation in financial markets.
Spreads-to-Treasuries (differences in yields) for high-yield bonds narrowed
across all ratings categories. The "sweet-spot" from a performance perspective
was the single B category. At year-end, single Bs made up approximately 71% of
the Fund, and this large allocation contributed to the Fund's good relative
performance during the quarter.
Throughout the year I emphasized larger, more liquid bond issues, which
proved particularly beneficial in August and September, as liquidity became an
increasing concern. I also favored debt from larger, better-capitalized
companies, especially those with public equity that had performed well.
Improving equity pricing gives an issuer an alternative "currency" and a
potential vehicle for deleveraging. Finally, I looked for companies with
primarily domestic businesses. The better performers in the Fund shared some or
all of these traits, and included companies like Qwest Communications, Allied
Waste Industries, and Ball Corp.
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE COMPANIES NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
NEXTLINK Communications, Inc. ..................................... 2.6%
(Telephone)
Intermedia Communication, Inc. ..................................... 2.5
(Telephone)
Chancellor Media Corp. ............................................. 2.5
(Broadcasting)
Qwest Communications International, Inc. ............................ 2.4
(Telecommunications)
AES Corp. .......................................................... 2.4
(Power Producer - Independent
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(July to Dec.) COST (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Global Crossing Holdings, Ltd. ..................................... $2,006
Ball Corp. .......................................................... 1,758
Hayes Lemmerz International, Inc. ................................... 1,750
Comcast Corp. ....................................................... 1,586
Genesis Health Ventures, Inc. ....................................... 1,530
<CAPTION>
TOP FIVE SALES PROCEEDS
(July to Dec.) (000'S)
- ----------------------------------------------------------------------------
<S> <C>
Level 3 Communications, Inc. ....................................... $1,821
Integrated Health Services, Inc. .................................... 1,313
Advanced Lighting Technologies, Inc. ................................ 1,310
Adelphia Communications Corp. ....................................... 1,302
Dyersburg Corp. ..................................................... 1,209
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Broadcasting ........................................................ 14%
Telephone ............................................................ 10
Telecommunications .................................................... 4
Manufacturing (Specialized) ........................................... 4
Manufacturing (Diversified) ........................................... 3
</TABLE>
CURRENT YIELD (30-DAY) CLASS A ......................................... 7.79%
CURRENT YIELD (30-DAY) CLASS B ......................................... 7.20%
WEIGHTED AVERAGE MATURITY .......................................... 7.6 YEARS
- 47 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE HIGH-YIELD BOND FUND MANAGER
In the fourth quarter, I added Chancellor Media to the Fund. Chancellor is
engaged in radio and television broadcasting, and outdoor advertising. An active
industry consolidator, Chancellor has the potential to use its increased cash
flow to reduce debt, and achieve a higher investment rating. I also purchased
Hayes Lemmerz, a manufacturer of automotive wheels and brake products. They
supply these products both to the original equipment manufacturers and the
after-market, and command number one or two market positions in most markets
where they compete.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CREDIT RATING DISTRIBUTION
AS A PERCENTAGE OF NET ASSETS
<S> <C>
BB: 15%
B: 71%
Not Rated: 2%
Preferred Stock: 3%
Cash & Other: 9%
</TABLE>
The Fund ended the year with net assets of just over $84 million invested in
66 companies in 42 industries. My strategy for 1999 will be much like this
year's. I believe the U.S. economy will grow at a slightly slower pace than last
year, and that inflation will remain subdued. I intend to maintain a
well-diversified portfolio that allows investors to participate in the
high-yield market.
Robert Kern
- -------------------------------
Robert Kern joined SAFECO in 1988 with B.S. degrees in business and accounting
from the Universities of Washington and Puget Sound, respectively. Robert is a
Certified Public Accountant and a Chartered Financial Analyst.
- 48 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
<C> <S>
- -----------------------------------------------------------------------------
CORPORATE BONDS - 88.2%
ADVERTISING - 1.3%
$1,000 Lamar Advertising Co.
9.625%, due 12/01/06 ............................... $1,070
AEROSPACE/DEFENSE - 1.2%
1,000 BE Aerospace, Inc.
8.00%, due 3/01/08 ..................................... 990
AGRICULTURE/FERTILIZER PRODUCTS - 1.3%
1,000 Sun World International
11.25%, due 4/15/04 .................................. 1,060
AIR FREIGHT - 1.8%
1,500 #Atlas Air, Inc. (144A)
9.375%, due 11/15/06 (acquired 11/13/98) ............. 1,530
ALUMINUM - 2.3%
1,000 Commonwealth Aluminum Corp.
10.75%, due 10/01/06 ................................. 1,005
1,000 Wells Aluminum Corp.
10.125%, due 6/01/05 ................................... 960
AUTO PARTS & EQUIPMENT - 2.1%
1,750 #Hayes Lemmerz International, Inc. (144A)
8.25%, due 12/15/08 (acquired 12/07/98) .............. 1,741
BANKS (REGIONAL) - 1.4%
1,250 Bay View Capital Corp.
9.125%, due 8/15/07 .................................. 1,206
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
BROADCASTING (TELEVISION, RADIO & CABLE) - 13.0%
$1,750 21st Century Telecom Group, Inc.
12.25%, beg. 2/15/03 Step Bond due 2/15/08 ........... $ 735
1,500 Adelphia Communications Corp.
8.125%, due 7/15/03 .................................. 1,536
750 #Avalon Cable of Michigan (144A)
9.375%, due 12/01/08 (acquired 12/03/98) ............... 767
526 CBS Radio, Inc.
11.375%, due 1/15/09 ................................... 626
500 Century Communications Corp.
9.50%, due 3/01/05 ..................................... 555
500 Century Communications Corp.
8.875%, due 1/15/07 .................................... 552
1,000 Chancellor Media Corp.
9.00%, due 10/01/08 .................................. 1,055
1,000 #Chancellor Media Corp.
8.00%, due 11/01/08 (144A) (acquired 11/11/98) ....... 1,022
1,500 Comcast Corp.
9.50%, due 1/15/08 ................................... 1,597
1,000 Jones Intercable, Inc.
8.875%, due 4/01/07 .................................. 1,085
329 SFX Broadcasting, Inc.
10.75%, due 5/15/06 .................................... 360
1,000 Young Broadcasting, Inc.
9.00%, due 1/15/06 ................................... 1,010
BUILDING MATERIALS - 0.6%
500 Synthetic Industries, Inc.
9.25%, due 2/15/07 ..................................... 510
CHEMICALS (SPECIALTY) - 0.6%
500 Sovereign Specialty Chemicals, Inc.
9.50%, due 8/01/07 ..................................... 507
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 49 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
COMMUNICATIONS EQUIPMENT - 2.3%
$ 500 #National Equipment Services, Inc.
10.00%, due 11/30/04 (144A) (acquired 12/08/98) ...... $ 487
1,500 National Equipment Services, Inc.
10.00%, due 11/30/04 ................................. 1,463
CONTAINERS (METAL & GLASS) - 1.9%
1,500 #Ball Corp. (144A)
8.25%, due 8/01/08 (acquired 8/08/98) ................ 1,560
CONTAINERS (PACKAGING & PAPER) - 0.6%
500 Printpack, Inc.
10.625%, due 8/15/06 ................................... 490
COSMETICS - 1.2%
1,000 French Fragrances, Inc.
10.375%, due 5/15/07 ................................... 985
ELECTRIC COMPANIES - 1.4%
1,500 Niagara Mohawk Power Corp.
8.50%, beg. 7/01/03 Step Bond due 7/01/10 ............ 1,168
ENTERTAINMENT - 2.8%
500 Cinemark USA, Inc. (Series B)
9.625%, due 8/01/08 .................................... 522
500 Cinemark USA, Inc. (Series D)
9.625%, due 8/01/08 .................................... 522
1,250 Premier Parks, Inc.
9.25%, due 4/01/06 ................................... 1,292
FINANCIAL (DIVERSIFIED) - 2.3%
1,000 Americredit Corp.
9.25%, due 2/01/04 ..................................... 980
1,000 DVI, Inc.
9.875%, due 2/01/04 .................................... 993
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
FOODS - 0.6%
$ 500 Chiquita Brands International, Inc.
10.25%, due 11/01/06 ................................. $ 519
HEALTH CARE (HOSPITAL MANAGEMENT) - 1.7%
1,500 Genesis Health Ventures, Inc.
9.25%, due 10/01/06 .................................. 1,410
HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES) - 1.1%
1,000 Quorum Health Group, Inc.
8.75%, due 11/01/05 .................................... 955
HOUSEHOLD FURNITURE & APPLIANCES - 2.2%
2,000 Holmes Products Corp.
9.875%, due 11/15/07 ................................. 1,890
LODGING (HOTELS) - 1.7%
1,500 HMH Properties, Inc.
7.875%, due 8/01/08 .................................. 1,447
MANUFACTURING (DIVERSIFIED) - 3.1%
1,000 #Nortek, Inc. (144A)
8.875%, due 8/01/08 (acquired 7/28/98) ............... 1,020
1,560 Tekni-Plex, Inc.
9.25%, due 3/01/08 ................................... 1,630
MANUFACTURING (SPECIALIZED) - 3.6%
1,500 Flextronics International, Ltd.
8.75%, due 10/15/07 .................................. 1,541
1,600 Numatics, Inc.
9.625%, due 4/01/08 .................................. 1,496
OIL & GAS (DRILLING & EQUIPMENT) - 2.2%
500 ICO, Inc.
10.375%, due 6/01/07 ................................... 465
1,500 Newpark Resources, Inc.
8.625%, due 12/15/07 ................................. 1,421
OIL & GAS (EXPLORATION & PRODUCTION) - 1.7%
1,500 Ocean Energy, Inc.
8.375%, due 7/01/08 .................................. 1,395
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 50 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
PAPER & FOREST PRODUCTS - 0.6%
$ 500 Specialty Paperboard, Inc.
9.375%, due 10/15/06 ................................. $ 505
POWER PRODUCER (INDEPENDENT) - 2.4%
2,000 AES Corp.
8.50%, due 11/01/07 .................................. 2,025
PUBLISHING - 3.0%
1,000 #Big Flower Press Holdings, Inc. (144A)
8.625%, due 12/01/08 (aquired 12/02/98) .............. 1,010
500 #World Color Press, Inc. (144A)
8.375%, due 11/15/08 (aquired 11/12/98) ................ 500
1,000 Ziff-Davis, Inc.
8.50%, due 5/01/08 ..................................... 980
RESTAURANTS - 1.9%
1,500 Perkins Family Restaurants
10.125%, due 12/15/07 ................................ 1,590
RETAIL (DEPARTMENT STORES) - 1.2%
1,250 Specialty Retailers, Inc.
9.00%, due 7/15/07 ................................... 1,013
RETAIL (FOOD CHAINS) - 2.3%
1,750 Randall's Food Markets, Inc.
9.375%, 7/01/07 ...................................... 1,894
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
RETAIL (OTHER) - 0.9%
$ 750 Purina Mills, Inc.
9.00%, due 3/15/10 ................................... $ 765
RETAIL (SPECIALTY) - 1.5%
1,250 Big 5 Corp.
10.875%, due 11/15/07 ................................ 1,263
SERVICES - 0.3%
250 #Ackerley Group, Inc. (144A)
9.00%, due 1/15/09 (aquired 12/09/98) .................. 254
SERVICES (COMMERCIAL & CONSUMER) - 1.7%
1,500 Unicco Service Corp.
9.875%, due 10/15/07 ................................. 1,448
SERVICES (COMPUTER SYSTEMS) - 0.6%
500 #Verio, Inc. (144A)
11.25%, due 12/01/08 (aquired 11/20/98) ................ 503
TELECOMMUNICATIONS (LONG DISTANCE) - 3.9%
1,250 Flag Ltd.
8.25%, due 1/30/08 ................................... 1,228
2,000 Qwest Communications International, Inc.
9.47%, beg. 10/15/02 Step Bond due 10/15/07 .......... 1,545
500 #Qwest Communications International, Inc.
7.25%, due 11/01/08 (144A) (acquired 11/19/98) ......... 510
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 51 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
TELEPHONE - 8.0%
$1,250 GCI, Inc.
9.75%, due 8/01/07 ................................. $ 1,238
1,000 Intermedia Communication, Inc.
11.25%, beg. 7/15/02 Step Bond due 7/15/07 ............. 680
1,000 Intermedia Communication, Inc.
8.875%, due 11/01/07 ................................... 965
500 Intermedia Communication, Inc.
8.60%, due 6/01/08 ..................................... 475
500 #Metromedia Fiber Network, Inc. (144A)
10.00%, due 11/15/08 (acquired 11/20/98) ............... 514
1,000 #NEXTLINK Communications, Inc.
10.75%, due 11/15/08 (144A) (acquired 11/04/98) ...... 1,018
2,000 NEXTLINK Communications, Inc.
9.45%, beg. 4/15/03 Step Bond due 4/15/08 ............ 1,140
1,250 TeleHub Communications Corp.
13.875%, beg. 7/31/01 Step Bond due 7/31/05 ............ 663
TEXTILES (HOME FURNISHINGS) - 1.2%
1,000 Maxim Group, Inc.
9.25%, due 10/15/07 .................................... 990
TEXTILES (SPECIALTY) - 1.2%
1,000 Polymer Group, Inc.
9.00%, due 7/01/07 ..................................... 990
TRUCKERS - 1.5%
1,250 Allied Holdings, Inc.
8.625%, due 10/01/07 ................................. 1,269
-----
TOTAL CORPORATE BONDS ............................................... 74,105
-----
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
PREFERRED STOCK - 3.4%
BROADCASTING (TELEVISION, RADIO & CABLE) - 1.1%
$ 3 SFX Broadcasting, Inc. ............................. $ 341
5 Sinclair Broadcast Group, Inc. ........................ 545
TELEPHONE - 2.3%
20 #Global Crossing Holdings, Ltd. (144A) (acquired
11/24/98) ............................................ 1,960
-----
TOTAL PREFERRED STOCK ................................................. 2,846
-----
TEMPORARY INVESTMENTS - 5.3%
INVESTMENT COMPANIES -
4,146 SSgA Prime Money Market Portfolio .................... 4,146
361 SSgA U.S. Treasury Money Market Portfolio .............. 361
-----
TOTAL TEMPORARY INVESTMENTS ........................................... 4,507
-----
TOTAL INVESTMENTS - 96.9% ........................................... 81,458
Other Assets, less Liabilities ........................................ 2,583
-----
NET ASSETS ......................................................... $84,041
-----
-----
- -----------------------------------------------------------------------------
</TABLE>
# Securities are exempt from registration and restricted as to resale only to
dealers, or through a dealer to an "accredited investor" or a "qualified
institutional buyer". The total cost of such securities is $14,241,846 and the
total value is 17.13% of net assets.
SEE NOTES TO FINANCIAL STATEMENTS
- 52 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO INTERMEDIATE-TERM
U.S. TREASURY FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The SAFECO Intermediate-Term U.S. Treasury Fund returned -0.52%* for Class A
shares and -0.71%* for Class B shares for the quarter ended December 31, 1998,
compared to -0.44% for the average fund as reported by Lipper, Inc. The Merrill
Lynch Intermediate-Term Treasury Index reported a gain of 0.23% for the quarter.
For the full year, the SAFECO Fund returned 9.08%* for Class A shares and 8.30%*
for Class B shares compared to 9.05% for the average fund and 8.63% for the
Index.
Duration is a measure of price sensitivity to interest rate changes. A
longer average duration in the Fund, 4.9 versus 3.1, explains why the Fund
[PHOTO OF RONALD SPAULDING]
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SAHRES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED JUNE 30, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
SINCE SINCE
1 YEAR 5 YEAR INCEPTION* 1 YEAR 5 YEAR INCEPTION*
<S> <C> <C> <C> <C> <C> <C>
Class A 4.17% 4.90% 7.25% 9.08% 5.88% 7.75%
Class B 3.30% 5.23% 7.58% 8.30% 5.56% 7.58%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
INTERMEDIATE- INTERMEDIATE-
TERM TERM
U.S. U.S. MERRILL
TREASURY TREASURY LYNCH
FUND FUND INTERMEDIATE-TERM
CLASS A CLASS B TREASURY INDEX
<S> <C> <C> <C>
12/31/88 $9,550 $10,000 $10,000
01/31/89 $9,606 $10,059 $10,099
02/28/89 $9,558 $10,008 $10,057
03/31/89 $9,575 $10,026 $10,106
04/30/89 $9,744 $10,202 $10,293
05/31/89 $9,915 $10,382 $10,510
06/30/89 $10,140 $10,617 $10,777
07/31/89 $10,318 $10,804 $10,998
08/31/89 $10,222 $10,704 $10,845
09/30/89 $10,264 $10,747 $10,899
10/31/89 $10,436 $10,928 $11,123
11/30/89 $10,513 $11,008 $11,232
12/31/89 $10,534 $11,030 $11,260
01/31/90 $10,472 $10,965 $11,196
02/28/90 $10,524 $11,020 $11,224
03/31/90 $10,518 $11,014 $11,246
04/30/90 $10,492 $10,986 $11,207
05/31/90 $10,690 $11,194 $11,443
06/30/90 $10,799 $11,308 $11,593
07/31/90 $10,945 $11,460 $11,759
08/31/90 $10,904 $11,418 $11,708
09/30/90 $10,947 $11,463 $11,815
10/31/90 $11,035 $11,554 $11,979
11/30/90 $11,149 $11,674 $12,158
12/31/90 $11,289 $11,821 $12,330
01/31/91 $11,339 $11,874 $12,455
02/28/91 $11,428 $11,966 $12,520
03/31/91 $11,509 $12,051 $12,588
04/30/91 $11,636 $12,185 $12,719
05/31/91 $11,698 $12,249 $12,791
06/30/91 $11,712 $12,264 $12,804
07/31/91 $11,857 $12,416 $12,942
08/31/91 $12,057 $12,626 $13,184
09/30/91 $12,238 $12,815 $13,408
10/31/91 $12,370 $12,953 $13,560
11/30/91 $12,498 $13,086 $13,719
12/31/91 $12,815 $13,419 $14,054
01/31/92 $12,668 $13,265 $13,912
02/28/92 $12,684 $13,282 $13,965
03/31/92 $12,638 $13,233 $13,908
04/30/92 $12,734 $13,334 $14,035
05/31/92 $12,917 $13,526 $14,235
06/30/92 $13,119 $13,738 $14,442
07/31/92 $13,446 $14,080 $14,710
08/31/92 $13,551 $14,190 $14,879
09/30/92 $13,803 $14,454 $15,085
10/31/92 $13,550 $14,189 $14,900
11/30/92 $13,467 $14,101 $14,834
12/31/92 $13,656 $14,299 $15,029
01/31/93 $14,008 $14,667 $15,310
02/28/93 $14,317 $14,992 $15,539
03/31/93 $14,375 $15,053 $15,598
04/30/93 $14,478 $15,160 $15,721
05/31/93 $14,431 $15,110 $15,674
06/30/93 $14,780 $15,476 $15,899
07/31/93 $14,803 $15,501 $15,932
08/31/93 $15,168 $15,883 $16,175
09/30/93 $15,253 $15,972 $16,245
10/31/93 $15,288 $16,007 $16,273
11/30/93 $15,042 $15,751 $16,195
12/31/93 $15,136 $15,850 $16,258
01/31/94 $15,333 $16,055 $16,420
02/28/94 $14,927 $15,631 $16,187
03/31/94 $14,614 $15,302 $15,960
04/30/94 $14,509 $15,193 $15,852
05/31/94 $14,515 $15,200 $15,868
06/30/94 $14,488 $15,171 $15,880
07/31/94 $14,680 $15,372 $16,077
08/31/94 $14,717 $15,412 $16,127
09/30/94 $14,557 $15,243 $15,997
10/31/94 $14,563 $15,249 $16,001
11/30/94 $14,533 $15,217 $15,921
12/31/94 $14,590 $15,277 $15,981
01/31/95 $14,756 $15,452 $16,247
02/28/95 $14,977 $15,683 $16,558
03/31/95 $15,054 $15,763 $16,648
04/30/95 $15,239 $15,957 $16,839
05/31/95 $15,821 $16,567 $17,321
06/30/95 $15,928 $16,677 $17,434
07/31/95 $15,804 $16,549 $17,445
08/31/95 $15,992 $16,745 $17,588
09/30/95 $16,169 $16,931 $17,707
10/31/95 $16,414 $17,188 $17,906
11/30/95 $16,749 $17,538 $18,129
12/31/95 $17,033 $17,835 $18,314
01/31/96 $17,088 $17,894 $18,471
02/28/96 $16,671 $17,457 $18,264
03/31/96 $16,497 $17,274 $18,176
04/30/96 $16,462 $17,238 $18,119
05/31/96 $16,460 $17,235 $18,109
06/30/96 $16,579 $17,360 $18,286
07/31/96 $16,631 $17,415 $18,342
08/31/96 $16,629 $17,413 $18,362
09/30/96 $16,815 $17,608 $18,596
10/31/96 $17,020 $17,810 $18,898
11/30/96 $17,234 $18,043 $19,131
12/31/96 $17,089 $17,881 $19,027
01/31/97 $17,136 $17,905 $19,097
02/28/97 $17,103 $17,864 $19,118
03/31/97 $16,889 $17,632 $19,021
04/30/97 $17,101 $17,848 $19,234
05/31/97 $17,220 $17,973 $19,382
06/30/97 $17,403 $18,155 $19,549
07/31/97 $17,898 $18,663 $19,916
08/31/97 $17,676 $18,422 $19,831
09/30/97 $17,940 $18,682 $20,050
10/31/97 $18,236 $18,977 $20,283
11/30/97 $18,244 $18,971 $20,329
12/31/97 $18,460 $19,181 $20,502
01/31/98 $18,751 $19,458 $20,778
02/28/98 $18,664 $19,371 $20,751
03/31/98 $18,693 $19,393 $20,820
04/30/98 $18,755 $19,448 $20,913
05/31/98 $18,909 $19,599 $21,054
06/30/98 $19,079 $19,747 $21,200
07/31/98 $19,092 $19,769 $21,284
08/31/98 $19,572 $20,239 $21,709
09/30/98 $20,241 $20,921 $22,221
10/31/98 $20,153 $20,814 $22,272
11/30/98 $20,056 $20,702 $22,189
12/31/98 $20,137 $20,773 $22,271
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 53 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE INTERMEDIATE-TERM U.S. TREASURY FUND MANAGER
performed better than the Index for the full year, and fared worse in the fourth
quarter. As interest rates declined in the first nine months of 1998, prices
moved up faster on the longer duration bonds, such as those held by the Fund. In
the fourth quarter the trend reversed: interest rates rose and the Fund declined
faster than the Index. Our average duration has been similar to, or slightly
longer than, our peers as well.
Trading activity was light in the fourth quarter. We bought six-month U.S.
Treasury Bills and 10-year U.S. Treasury Notes while maintaining an average
maturity at six years. U.S. Treasury securities comprise 79% of the Fund and
U.S. Government Agency Securities add another 16%.
We expect the year ahead to be good for bonds, but not as positive as 1998. A
slowing economy, low inflation, and a neutral Federal Reserve provide a strong
foundation for the U.S. bond market. But there are some concerns. While the
consensus of economists has been for a slowdown in the U.S. domestic economy for
at least two quarters, to date there has been little evidence of slowing.
Indeed, economic data released in January point to acceleration in economic
growth. The Fed almost certainly will not ease again as many investors are
hoping and counting on.
HIGHLIGHTS
-------------------------------
CURRENT YIELD (30-DAY) CLASS A ......................................... 3.22%
CURRENT YIELD (30-DAY) CLASS B ......................................... 2.68%
WEIGHTED AVERAGE MATURITY .......................................... 6.0 YEARS
The international situation likewise clouds the future. Persistent economic
weakness in Asia could set off another flight to quality and push bond prices
higher. On the other hand, strength in the new European currency, the Euro,
could weaken the dollar and push bond prices lower. We are forecasting a modest
increase in bond prices.
However, given the renewed strength in the economy, we no longer feel
comfortable with a duration that is 50 percent longer than the comparable index.
If the economy carries interest rates higher and the Fed is unlikely to ease,
we're better to err to the short side. After the end of the quarter, I
restructured the portfolio to bring our average duration in line with Merrill
Lynch's Intermediate-Term Treasury Index.
Ronald Spaulding
- -------------------------------
Ronald Spaulding is the chief investment officer of SAFECO Corporation. In 1995,
he became vice president and treasurer of SAFECO Corporation, director of the
insurance subsidiaries, vice chairman of SAFECO Asset Management Company, and
vice president and treasurer of SAFECO Mutual Funds. He holds an M.B.A. from the
University of Washington and is a Chartered Financial Analyst.
- 54 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
<C> <S>
- -----------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES - 95.5%
U.S. FEDERAL AGENCY NOTES - 16.2%
$1,500 6.875%, due 11/22/06 ............................... $ 1,558
1,500 6.26%, due 9/24/04 ................................... 1,578
500 5.785%, due 4/14/08 .................................... 515
500 5.75%, due 2/15/08 ..................................... 518
U.S. TREASURY NOTES - 68.3%
2,200 7.75%, due 2/15/01 ................................... 2,335
1,200 7.50%, due 11/15/01 .................................. 1,290
2,070 7.25%, due 8/15/04 ................................... 2,328
1,310 6.875%, due 3/31/00 .................................. 1,344
3,900 6.50%, due 10/15/06 .................................. 4,329
5,550 5.625%, due 5/15/08 .................................. 5,921
U.S. TREASURY BILLS / STRIPS - 11.0%
1,500 0.00%, due 4/01/99 ................................... 1,484
1,975 0.00%, due 2/15/07 ................................... 1,336
-----
TOTAL U.S. GOVERNMENT SECURITIES ..................................... 24,536
-----
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
TEMPORARY INVESTMENTS - 3.5%
INVESTMENT COMPANIES:
$889 SSgA Prime Money Market Portfolio ................... $ 889
-----
TOTAL TEMPORARY INVESTMENTS ............................................. 889
-----
TOTAL INVESTMENTS - 99.0% ............................................ 25,425
Other Assets, less Liabilities .......................................... 257
-----
NET ASSETS .......................................................... $25,682
-----
-----
- -----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 55 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO MANAGED BOND FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Managed Bond Fund returned 7.87%* for Class A shares and 6.67%* for Class
B shares for the year, while the average intermediate-term investment-grade debt
fund returned 7.25% according to Lipper, Inc. The Fund returned -0.92%* for
Class A shares and -1.13%* for Class B shares for the quarter compared to its
peers 0.03%.
The Lehman Brothers Government/Corporate Bond Index-- which incurs no fees or
expenses--returned 0.13% for the quarter and 9.47% for the year. (Before fees
and expenses, the Managed Bond Fund outperformed its benchmark index for the
year.)
Our underperformance of our peers during the quarter and outperformance for
the year can [PHOTO OF MICHAEL HUGHES]
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED JUNE 30, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
SINCE SINCE
1 YEAR INCEPTION 1 YEAR INCEPTION
<S> <C> <C> <C> <C>
Class A 3.02% 4.98% 7.87% 5.98%
Class B 1.67% 5.18% 6.67% 5.52%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
MANAGED BOND MANAGED BOND LEHMAN BROTHERS
FUND FUND GOVERNMENT/
CLASS A CLASS B CORPORATE INDEX
<S> <C> <C> <C>
02/28/94 $9,550 $10,000 $10,000
03/31/94 $9,231 $9,666 $9,755
04/30/94 $9,223 $9,657 $9,674
05/31/94 $9,232 $9,666 $9,657
06/30/94 $9,219 $9,653 $9,634
07/31/94 $9,318 $9,756 $9,827
08/31/94 $9,340 $9,780 $9,831
09/30/94 $9,266 $9,703 $9,683
10/31/94 $9,272 $9,709 $9,672
11/30/94 $9,245 $9,680 $9,655
12/31/94 $9,263 $9,699 $9,718
01/31/95 $9,386 $9,828 $9,905
02/28/95 $9,541 $9,991 $10,135
03/31/95 $9,587 $10,038 $10,203
04/30/95 $9,709 $10,167 $10,344
05/31/95 $10,059 $10,533 $10,778
06/30/95 $10,137 $10,615 $10,864
07/31/95 $10,067 $10,542 $10,822
08/31/95 $10,193 $10,673 $10,960
09/30/95 $10,305 $10,791 $11,072
10/31/95 $10,469 $10,962 $11,235
11/30/95 $10,675 $11,178 $11,420
12/31/95 $10,870 $11,382 $11,588
01/31/96 $10,887 $11,399 $11,660
02/28/96 $10,627 $11,127 $11,412
03/31/96 $10,514 $11,010 $11,317
04/30/96 $10,509 $11,004 $11,239
05/31/96 $10,513 $11,009 $11,219
06/30/96 $10,593 $11,092 $11,370
07/31/96 $10,626 $11,127 $11,396
08/31/96 $10,646 $11,147 $11,369
09/30/96 $10,733 $11,239 $11,571
10/31/96 $10,843 $11,347 $11,841
11/30/96 $10,965 $11,467 $12,058
12/31/96 $10,877 $11,368 $11,925
01/31/97 $10,884 $11,368 $11,939
02/28/97 $10,858 $11,336 $11,964
03/31/97 $10,715 $11,179 $11,822
04/30/97 $10,864 $11,327 $11,994
05/31/97 $10,946 $11,406 $12,106
06/30/97 $11,055 $11,511 $12,251
07/31/97 $11,378 $11,839 $12,626
08/31/97 $11,230 $11,664 $12,484
09/30/97 $11,397 $11,842 $12,680
10/31/97 $11,577 $12,021 $12,883
11/30/97 $11,593 $12,028 $12,952
12/31/97 $11,723 $12,154 $13,088
01/31/98 $11,917 $12,343 $13,272
02/28/98 $11,865 $12,276 $13,246
03/31/98 $11,885 $12,284 $13,287
04/30/98 $11,927 $12,303 $13,353
05/31/98 $12,066 $12,435 $13,496
06/30/98 $12,175 $12,536 $13,634
07/31/98 $12,168 $12,532 $13,645
08/31/98 $12,449 $12,798 $13,911
09/30/98 $12,763 $13,113 $14,308
10/31/98 $12,605 $12,936 $14,207
11/30/98 $12,626 $12,948 $14,292
12/31/98 $12,645 $12,965 $14,326
</TABLE>
Graph and average annual return comparison begins February 28, 1994 (initial
public offering).
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 56 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
be attributed to three things. First, the Fund's duration (sensitivity to
interest rates) was somewhat longer than both its peer group and benchmark.
Thus, as interest rates rose approximately 0.25% during the fourth quarter the
Fund lagged. However, being longer allowed the Fund to make greater gains as
rates declined overall, by roughly 1%, for the year.
Second, the portfolio held relatively more of its assets in Treasuries, which
were top bond performers in 1998. This conservative posture worked very well
through the middle of
HIGHLIGHTS
-------------------------------
<TABLE>
<CAPTION>
PERCENT OF
BONDS BY TYPE NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
U.S. Treasury Securities ............................................ 42%
Asset Backed Securities .............................................. 24
Corporate Bonds ...................................................... 33
Cash & Other .......................................................... 1
----
100%
----
----
</TABLE>
CURRENT YIELD (30-DAY) CLASS A ......................................... 2.92%
CURRENT YIELD (30-DAY) CLASS B ......................................... 2.66%
WEIGHTED AVERAGE MATURITY .......................................... 9.7 YEARS
October until Treasuries came down off their flight-to-quality highs, and credit
sensitive instruments--particularly high quality domestic corporate
bonds--outperformed. Third, the Fund's relatively high allocation to mortgage-
backed securities was a drag on relative performance as this sector
underperformed for both the quarter and the year.
The year 1998 will go down as one of the most volatile bond trading years in
history. At the beginning of the year, the markets were less concerned about the
possible effects of the Asian debacle, and more focused on the possibility of
the Fed raising interest rates. It was smooth sailing until August when Russia
defaulted on its debt and triggered a surge of flight-to-quality buying into
Treasuries. Volatility soared, and spread product (i.e., non-Treasury Bonds)
collapsed. In an effort to support nervous markets, the Fed reduced rates three
times by a total of 75 basis points over a seven-week period, thereby boosting
investor confidence.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
<S> <C>
AAA: 81%
AA: 4%
A: 12%
BBB: 2%
Cash & Other: 1%
</TABLE>
- 57 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE MANAGED BOND FUND MANAGER
Around October, as market sentiment shifted away from the global Armageddon
scenario, investors began bottom-fishing quality credits. The spread product
tightened sharply, staging one of the most impressive rallies on record, while
U.S. Treasuries lagged.
Although I am concerned at the pace of spread tightening, I am encouraged by
the return of liquidity to the U.S. credit markets. I expect continued
improvement in spread product relative to U.S. Treasuries. However, as the year
progresses, one, or more, of the many potential problems in the global economy
may spur another flight to U.S. Treasuries. Given that very real possibility, I
took defensive precautions during the fourth quarter. I replaced corporate
bonds, international issues, and triple-B rated securities with U.S. Treasury
obligations and extremely large high-quality domestic corporate bond offerings
to improve our overall portfolio quality and liquidity.
At year-end, the Fund held 42% of its assets in U.S. Treasury obligations,
24% in Asset-Backed Securities, 17% in high-grade Corporate Bonds, 16% in U.S.
Agency Debentures, and 5% in cash. The portfolio's effective duration was 6.9
years at year end, longer than the duration of the Lehman Brothers
Government/Corporate Bond Index at 5.6 years. The Fund is maintaining an average
credit quality rating of triple-A.
Going forward, I will continue to use a combination of active duration
management, sector rotation, yield-curve positioning, and credit selection to
keep us well positioned for whatever 1999 may bring.
Michael Hughes
- -------------------------------
Michael Hughes joined SAFECO as a 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.
- 58 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MANAGED BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
<C> <S>
- -----------------------------------------------------------------------------
ASSET BACKED SECURITIES - 24.1%
COLLATERIZED MORTGAGE OBLIGATION (CMO) - 17.2%
$100 FHLMC REMIC 1579
6.55%, due 6/15/22 .................................... $101
150 FHLMC REMIC 1587
6.50%, due 10/15/08 .................................... 153
90 FNMA POOL 2494
8.00%, due 4/01/08 ...................................... 94
150 FNMA REMIC 1993-11 N
7.35%, due 6/25/07 ..................................... 154
75 FNMA REMIC 1992-108
7.00%, due 7/25/07 ...................................... 77
125 FNMA REMIC 1993-44 PH
6.75%, due 5/25/19 ..................................... 126
130 FNMA G93-33J
6.75%, due 6/25/22 ..................................... 133
150 FNMA 1997-M5 C
6.74%, due 8/25/07 ..................................... 158
100 FNMA REMIC 1993-23
6.70%, due 7/25/19 ..................................... 101
200 FNMA REMIC 1993-55
6.50%, due 2/25/05 ..................................... 205
FINANCE (CONSUMER) - 2.3%
81 AFG Receivables Trust
6.20%, due 2/15/03 ...................................... 82
90 Premier Auto Trust
6.20%, due 1/06/01 ...................................... 91
FINANCE (DIVERSIFIED & BUSINESS) - 3.5%
27 Chevy Chase Auto ABS Series 1996-1 (Class A)
6.60%, due 12/15/02 ..................................... 28
125 ComEd Transitional Funding Trust
5.674%, due 12/16/08 ................................... 126
104 DLJ Commercial Mortgage Corp. 1998-CF1 A1A
6.14%, due 10/15/06 .................................... 106
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
MANUFACTURING (SPECIALIZED) - 1.1%
$ 85 Harley Davidson Eagle
6.20%, due 1/15/03 ................................... $ 86
----
TOTAL ASSET BACKED SECURITIES ......................................... 1,821
----
CORPORATE BONDS - 17.0%
BANKS (MAJOR REGIONAL) - 1.4%
100 U.S. Bancorp
6.75%, due 10/15/05 .................................... 105
ELECTRIC COMPANIES - 1.4%
100 Israel Electric Corp.
7.125%, due 7/15/05 .................................... 103
ENGINEERING & CONSTRUCTION - 1.4%
97 Halliburton Co.
6.75%, due 2/01/27 ..................................... 109
FINANCE (CONSUMER) - 1.3%
90 Household Finance Corp.
7.25%, due 7/15/03 ...................................... 95
FINANCE (DIVERSIFIED & BUSINESS) - 5.8%
110 CIT Group, Inc.
5.57%, due 12/08/03 .................................... 109
50 American General Financial Corp.
5.75%, due 11/01/03 ..................................... 50
105 General Motors Acceptance Corp.
6.875%, due 7/15/01 .................................... 108
170 Hertz Corp.
7.00%, due 7/01/04 ..................................... 179
INVESTMENT BANKING/BROKERAGE - 2.4%
95 Donaldson, Lufkin & Jenrette, Inc.
6.90%, due 10/01/07 ..................................... 98
85 Merrill Lynch & Co., Inc.
6.00%, due 11/15/04 ..................................... 86
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 59 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MANAGED BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
RETAIL (COMPUTERS & ELECTRIC) - 2.2%
$160 Tandy Corp.
6.95%, due 9/1/07 .................................... $ 169
RETAIL (GENERAL MERCHANDISE) - 1.1%
75 Sears Roebuck Acceptance Corp.
6.75%, due 9/15/05 ...................................... 79
----
TOTAL CORPORATE BONDS ................................................. 1,290
----
U.S. GOVERNMENT SECURITIES - 57.9%
U.S. FEDERAL AGENCY NOTES - 15.9%
50 Federal Home Loan Mortgage Corp.
6.943%, due 3/21/07 ..................................... 56
600 FNMA
6.62%, due 6/25/07 ..................................... 655
500 FNMA
4.75%, due 11/14/03 .................................... 494
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
U. S. TREASURY NOTES - 42.0%
$895 7.50%, due 11/15/16 ................................. $1,113
30 6.50%, due 8/15/05 ...................................... 33
585 6.50%, due 10/15/06 .................................... 649
100 6.375%, due 8/15/02 .................................... 106
750 5.625%, due 5/15/08 .................................... 800
480 4.75%, due 11/15/08 .................................... 484
----
TOTAL U.S. GOVERNMENT SECURITIES ...................................... 4,390
----
TEMPORARY INVESTMENTS - 5.2%
INVESTMENT COMPANIES:
16 SSgA U.S. Treasury Money Market Portfolio ............... 16
379 SSgA Prime Money Market Portfolio ...................... 379
----
TOTAL TEMPORARY INVESTMENTS ............................................. 395
----
TOTAL INVESTMENTS - 104.2% ............................................ 7,896
Liabilities, less Other Assets ........................................ (321)
----
NET ASSETS ........................................................... $7,575
----
----
- -----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 60 -
<PAGE>
OVERVIEW OF THE
SAFECO MUNICIPAL BOND MARKET
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In a year characterized by excessive volatility in financial markets around
the globe, the municipal bond market was range bound. The yield on long-term
tax-exempt bonds varied by less than 50 basis points (0.5%) from high to low. It
closed 1998 at 5.16%, only 10 basis points (0.1%) lower than it opened the year.
The fourth quarter was even more uneventful, with long bonds trading in a 25
basis point (.25%) range. While yields on tax-exempts remained virtually
unchanged, long-term U.S. Treasury Bond yields fell, pushing the ratio of
tax-exempt to taxable yields as high as 105% on October 5th . The ratio remained
above 100% for most of fourth quarter, during which 30-year Treasury yields hit
all-time lows. [PHOTO OF STEPHEN C. BAUER]
The reasons for this unusual relationship in which Treasuries yielded less
than similar length munis were several. Foremost was the demand for Treasuries
(with little regard for yield) from foreign buyers seeking safe haven from their
battered economies, currencies, and financial markets. A second important factor
was that yields available in the muni market, and subsequently demand for muni
bonds, were near 20-year lows. Finally, there was supply. New issue volume was
surprisingly heavy throughout 1998 as strong balance sheets enabled state and
local governments to increase borrowing, and low rates encouraged them to
refinance. Total new issue volume for 1998 was $284 billion, a close second to
the record $292 billion of 1993, and up 29% from 1997.
Looking forward to 1999 and seeing almost no evidence of an increase in
inflation, it is hard to see what events might conspire to dramatically move
long-term interest rates in either direction. Another international financial
crisis and flight to quality could sharply lower U.S. Treasury yields. But the
duration of such a change could be brief and the effect on other financial
markets, especially municipals, might be nonexistent. I believe 1999 will be
another year of modest change for municipals although they should outperform
government bonds as the ratio of tax-exempt to taxable yields trends toward its
historical range.
- 61 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO MUNICIPAL BOND FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SAFECO Municipal Bond Fund returned -0.17%* for Class A shares and -0.27%*
for Class B shares to its peers' 0.09% for the fourth quarter of 1998. For the
full year, the Fund delivered 5.75%* for Class A shares and 5.08%* for Class B
shares to the competition's 5.32%, according to Lipper, Inc. The Fund's
longer-term results are gratifying as well. The Fund's average annual return was
6.03%* for Class A shares and 5.72%* for Class B shares for the five year
period and 8.17%* for Class A shares and 8.01%* for Class B shares for the ten
year period.
The Fund underperformed The Lehman Brothers Long Municipal Bond Index, which
returned 0.28% for the quarter and 6.90% for the year. This underperformance is
standard. It's nearly impossible to beat a bond index because it has no
expenses, no cash and no call features.
Since yields rose slightly during the fourth quarter, the Fund
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW - CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE YEAR ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
1 YEAR 5 YEAR 10 YEAR 1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C>
Class A 0.99% 5.05% 7.67% 5.75% 6.03% 8.17%
Class B 0.08% 5.40% 8.01% 5.08% 5.72% 8.01%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO LEHMAN
MUNICIPAL MUNICIPAL BROTHERS
BOND BOND LONG MUNICIPAL
FUND CLASS A FUND CLASS B BOND INDEX
<S> <C> <C> <C>
12/31/88 9,550 10,000 10,000
01/31/89 9,770 10,231 10,235
02/28/89 9,623 10,078 10,092
03/31/89 9,624 10,077 10,100
04/30/89 9,850 10,314 10,397
05/31/89 10,035 10,507 10,637
06/30/89 10,161 10,639 10,799
07/31/89 10,265 10,748 10,942
08/31/89 10,175 10,654 10,776
09/30/89 10,166 10,645 10,743
10/31/89 10,264 10,749 10,885
11/30/89 10,450 10,942 11,116
12/31/89 10,512 11,008 11,198
01/31/90 10,390 10,880 11,085
02/28/90 10,510 11,005 11,210
03/31/90 10,495 10,990 11,221
04/30/90 10,334 10,821 11,084
05/31/90 10,661 11,163 11,397
06/30/90 10,760 11,267 11,509
07/31/90 10,966 11,482 11,712
08/31/90 10,681 11,184 11,434
09/30/90 10,661 11,162 11,416
10/31/90 10,863 11,376 11,658
11/30/90 11,165 11,692 11,953
12/31/90 11,212 11,741 12,006
01/31/91 11,390 11,926 12,167
02/28/91 11,438 11,977 12,252
03/31/91 11,453 11,993 12,282
04/30/91 11,645 12,194 12,472
05/31/91 11,762 12,317 12,619
06/30/91 11,722 12,274 12,595
07/31/91 11,908 12,470 12,790
08/31/91 12,090 12,659 12,973
09/30/91 12,283 12,862 13,162
10/31/91 12,414 12,999 13,299
11/30/91 12,374 12,957 13,315
12/31/91 12,757 13,358 13,632
01/31/92 12,647 13,242 13,624
02/28/92 12,679 13,276 13,646
03/31/92 12,663 13,260 13,680
04/30/92 12,783 13,385 13,811
05/31/92 12,999 13,611 14,013
06/30/92 13,279 13,905 14,284
07/31/92 13,791 14,440 14,807
08/31/92 13,509 14,145 14,609
09/30/92 13,535 14,172 14,674
10/31/92 13,240 13,863 14,429
11/30/92 13,644 14,288 14,835
12/31/92 13,874 14,527 15,027
01/31/93 14,008 14,668 15,169
02/28/93 14,614 15,303 15,874
03/31/93 14,385 15,063 15,683
04/30/93 14,583 15,270 15,898
05/31/93 14,666 15,357 16,029
06/30/93 14,968 15,672 16,331
07/31/93 14,909 15,613 16,347
08/31/93 15,306 16,027 16,766
09/30/93 15,478 16,206 16,999
10/31/93 15,520 16,251 17,031
11/30/93 15,323 16,046 16,825
12/31/93 15,630 16,367 17,259
01/31/94 15,820 16,565 17,463
02/28/94 15,352 16,074 16,884
03/31/94 14,572 15,258 15,876
04/30/94 14,586 15,273 15,999
05/31/94 14,761 15,456 16,186
06/30/94 14,597 15,286 15,992
07/31/94 14,934 15,637 16,403
08/31/94 14,944 15,648 16,437
09/30/94 14,576 15,262 16,056
10/31/94 14,264 14,935 15,563
11/30/94 13,971 14,629 15,152
12/31/94 14,341 15,016 15,690
01/31/95 14,869 15,569 16,380
02/28/95 15,493 16,223 17,047
03/31/95 15,606 16,341 17,252
04/30/95 15,583 16,317 17,244
05/31/95 16,307 17,076 17,978
06/30/95 15,958 16,710 17,646
07/31/95 16,034 16,790 17,737
08/31/95 16,242 17,007 17,987
09/30/95 16,363 17,134 18,128
10/31/95 16,705 17,493 18,567
11/30/95 17,168 17,977 19,046
12/31/95 17,421 18,242 19,343
01/31/96 17,478 18,301 19,426
02/28/96 17,285 18,099 19,189
03/31/96 16,890 17,686 18,838
04/30/96 16,763 17,553 18,762
05/31/96 16,790 17,582 18,772
06/30/96 17,038 17,841 19,061
07/31/96 17,247 18,059 19,250
08/31/96 17,186 17,996 19,225
09/30/96 17,533 18,359 19,651
10/31/96 17,736 18,559 19,891
11/30/96 18,139 18,959 20,319
12/31/96 17,975 18,777 20,197
01/31/97 17,880 18,669 20,156
02/28/97 18,059 18,848 20,374
03/31/97 17,744 18,509 20,022
04/30/97 17,948 18,728 20,258
05/31/97 18,257 19,026 20,651
06/30/97 18,466 19,247 20,915
07/31/97 19,225 20,017 21,677
08/31/97 18,886 19,654 21,388
09/30/97 19,127 19,909 21,696
10/31/97 19,282 20,047 21,883
11/30/97 19,419 20,181 22,078
12/31/97 19,803 20,570 22,482
01/31/98 19,983 20,736 22,722
02/28/98 19,962 20,708 22,711
03/31/98 19,970 20,693 22,743
04/30/98 19,783 20,491 22,620
05/31/98 20,191 20,917 23,063
06/30/98 20,324 21,030 23,162
07/31/98 20,350 21,046 23,216
08/31/98 20,703 21,400 23,631
09/30/98 20,978 21,674 23,960
10/31/98 20,843 21,536 23,883
11/30/98 20,945 21,616 24,005
12/31/98 20,942 21,616 24,029
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 62 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
underperformed its peers over the three-month period. Our longer-than-average
maturity generally results in below-average returns when yields rise and prices
fall. However, it helps us outperform when yields decline. As our one, three,
five and 10-year results attest, our strategy of staying fully invested in long,
deep-discounted bonds has paid off.
After a year of looking, I found, in December, two opportunities to add yield
to the Fund. The first was the Indiana Development Finance Authority, issuing
bonds on behalf of USX Corporation, the holding company for U.S. Steel and
Marathon Oil. This credit is rated Baa2 by Moody's and BBB- by Standard & Poors
and came at a yield of 5.60% One week later, the Muni Bond Fund bought Vancouver
Housing Authority 5.65%, due 3/1/31, at a discount to yield 5.75%. Although this
issue is non-rated, the credit is sound, backed by the general credit of the
Housing Authority and a first mortgage pledge.
With the exception of these two issues, which were priced at or near par, I
have emphasized deeper discount bonds during 1998 and I expect to continue that
strategy in 1999. The additional call protection that is provided by deep
discount bonds could prove to be extremely beneficial if yields drop.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
<S> <C>
AAA: 43%
AA: 20%
A: 21%
BBB: 13%
B: 1%
Not Rated: 1%
Cash & Other: 1%
</TABLE>
HIGHLIGHTS
------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE STATES NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
California ............................................................. 18%
Washington .............................................................. 14
Texas ................................................................... 10
Indiana .................................................................. 8
New York ................................................................. 6
</TABLE>
CURRENT YIELD (30-DAY) CLASS A ......................................... 3.61%
CURRENT YIELD (30-DAY) CLASS B ......................................... 3.16%
WEIGHTED AVERAGE MATURITY ......................................... 24.5 YEARS
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
San Joaquin Hills Transportation Corridor Agency Senior Lien Toll Road
Revenue ............................................................. 4.4%
Illinois Educational Facilties Authority Adjustable Demand Revenue
(University of Chicago) .............................................. 3.6
Wyoming Community Develpoment
Authority Housing Revenue ............................................ 3.5
Indiana State Development Finance Authority Environmental Revenue ...... 3.2
Alaska Housing Finance Corp. (General Housing Purpose) ................. 3.1
</TABLE>
- 63 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
BONDS* - 99.0%
ALABAMA - 1.7%
$ 2,000 Alabama Special Care, Facilities Financing Authority of
Birmingham (Daughters of Charity, Providence Hospital and
St. Vincent's Hospital)
5.00%, due 11/01/25 ................................ $ 1,951
1,310 Board of Trustees Alabama Agriculture and Mechanical
University Revenue
5.50%, due 11/01/20 [MBIA] ........................... 1,447
1,000 Citronelle Industrial Development Board Pollution Control
Revenue
8.00%, due 12/01/12 .................................. 1,063
4,250 Jefferson County Sewer Revenue
5.70%, due 2/01/20 [FGIC] ............................ 4,533
ALASKA - 3.2%
17,000 Alaska Housing Finance Corp. (General Housing Purpose)
5.00%, due 12/01/18 ................................. 16,936
270 Alaska Housing Finance Corp. Collateralized (Veterans
Mortgage Program)
6.50%, due 6/01/31 ..................................... 278
ARIZONA - 1.7%
9,800 Phoenix Civic Improvement Corp. Wastewater System Lease
Revenue
4.75%, due 7/01/23 ................................... 9,389
CALIFORNIA - 18.4%
1,500 Foothill/Eastern Transportation Corridor Agency Toll Road
Revenue
5.00%, due 1/01/35 ................................... 1,430
2,500 Los Angeles County Certificates of Participation (Disney
Parking Project)
5.50%, due 9/01/21 ................................... 2,667
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
CALIFORNIA (CONTINUED)
$13,000 Los Angeles Department of Water and Power Electric Plant
Revenue
5.25%, due 11/15/26 ................................ $13,194
5,000 Los Angeles Wastewater System Revenue
4.70%, due 11/01/19 [FGIC] ........................... 4,804
2,200 Metropolitan Water District of Southern California
Waterworks Revenue
5.75%, due 3/01/14 ................................... 2,232
Northern California Power Agency Geothermal Project Revenue
1,700 5.00%, due 7/01/09 ................................... 1,701
3,550 / /5.00%, due 7/01/09 (Prerefunded 7/01/08@100) ...... 3,781
Pittsburg Redevelopment Agency Los Medanos Community
Development Project Tax Allocation
11,995 5.80%, due 8/01/34 [FSA] ............................ 13,268
6,400 4.625%, due 8/01/21 [AMBAC] .......................... 6,019
2,000 Redding Joint Powers Financing Authority Solid Waste and
Corporation Yard Revenue
5.00%, due 1/01/23 ................................... 1,951
8,750 Sacramento County Sanitation District Finance Authority
Revenue
4.75%, due 12/01/23 .................................. 8,309
1,700 San Francisco City and County Redevelopment Financing
Authority Tax Allocation Revenue
4.75%, due 8/01/18 [FGIC] ............................ 1,663
8,010 San Joaquin County Public Facilities Financing Corp.
Certificates of Participation Capital Facilities Project
4.75%, due 11/15/19 [MBIA] ........................... 7,702
25,000 San Joaquin Hills Transportation Corridor Agency Senior Lien
Toll Road Revenue
5.00%, due 1/01/33 .................................. 23,938
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 64 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
CALIFORNIA (CONTINUED)
Southern California Public Power Authority Power Project
Revenue (Multiple Projects)
$ 4,085 / /5.50%, due 7/01/20 (Prerefunded 7/01/00@100) .... $ 4,221
3,165 5.50%, due 7/01/20 ................................... 3,193
COLORADO - 0.2%
1,000 Colorado Housing Finance Authority Multi-Family Mortgage
Revenue
8.30%, due 10/01/23 .................................. 1,122
DISTRICT OF COLUMBIA - 4.5%
10,000 District of Columbia General Obligation
5.25%, due 6/01/27 [MBIA] ........................... 10,119
15,000 Washington Convention Center Authority Dedicated Tax Revenue
4.75%, due 10/01/28 [AMBAC] ......................... 14,026
FLORIDA - 0.5%
2,750 Mid-Bay Bridge Authority Revenue
6.05%, due 10/01/22 .................................. 2,951
GEORGIA - 2.2%
6,750 Atlanta Water and Sewage Revenue
4.50%, due 1/01/18 ................................... 6,292
5,000 Municipal Electric Authority Project One Special Obligation
Fourth Crossover Series
6.50%, due 1/01/20 ................................... 5,860
ILLINOIS - 5.6%
17,500 Illinois Educational Facilities Authority Adjustable Demand
Revenue (University of Chicago)
5.70%, due 12/01/25 ................................. 19,227
5,000 Metropolitan Pier and Exposition Authority McCormick Place
Convention Complex Hospitality Facilities Revenue
7.00%, due 7/01/26 ................................... 6,148
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
ILLINOIS (CONTINUED)
$ 4,770 University of Illinois Auxiliary Facilities System Revenue
5.75%, due 4/01/22 ................................. $ 4,992
INDIANA - 8.2%
200 Beech Grove Economic Development Revenue (Westvaco Corp.)
8.75%, due 7/01/10 ..................................... 204
11,000 / /East Chicago Elementary School Building Corp. First
Mortgage
7.00%, due 1/15/16 (Prerefunded 1/15/03@102) ........ 12,493
7,715 Hammond Multi-School Building Corp. First Mortgage Revenue
6.20%, due 7/10/15 ................................... 8,251
17,550 Indiana State Development Finance Authority Environmental
Revenue
5.60%, due 12/01/32 ................................. 17,417
6,450 Indianapolis Gas Utility System Revenue
4.00%, due 6/01/11 [FGIC] ............................ 6,221
KENTUCKY - 2.2%
12,000 Louisville and Jefferson Counties Metropolitan Sewer
District Sewer and Drain System Revenue
5.00%, due 5/15/30 [FGIC] ........................... 11,831
MARYLAND - 1.8%
5,125 Baltimore Project and Revenue (Water Projects)
5.00%, due 7/01/24 [FGIC] ............................ 5,195
5,000 Maryland Health and Higher Educational Facilities Authority
Revenue (University of Maryland Medical System)
4.75%, due 7/01/23 [FGIC] ............................ 4,743
MASSACHUSETTS - 3.8%
8,295 Massachusetts Bay Transportation Authority General
Transportation System
5.00%, due 3/01/27 [FGIC] ............................ 8,147
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 65 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
MASSACHUSETTS (CONTINUED)
$5,140 Massachusetts Housing Finance Agency (Rental Housing and
Mortgage Revenue)
6.20%, due 7/01/38 [AMBAC] .......................... $5,516
Massachusetts Water Resources Authority General Revenue
4,500 6.00%, due 4/01/20 ................................... 4,650
2,500 4.75%, due 12/01/23 .................................. 2,344
MICHIGAN - 1.3%
5,250 Detroit Water Supply System Revenue
4.75%, due 7/01/19 [FGIC] ............................ 5,024
2,000 University of Michigan Hospital Revenue
6.375%, due 12/01/24 ................................. 2,110
MISSOURI - 1.9%
5,000 Missouri Health and Education Facilities Authority
Educational Facilities Revenue
5.00%, due 11/15/37 .................................. 4,858
5,000 University of Missouri System Facilities Revenue
5.80%, due 11/01/27 .................................. 5,404
NEW JERSEY - 0.3%
1,275 / /New Jersey Turnpike Authority Revenue
10.375%, due 1/01/03 (Escrowed to Maturity) .......... 1,449
NEW MEXICO - 0.5%
2,500 Farmington Collateralized Pollution Control Revenue (Tucson
Gas and Electric Co.)
6.10%, due 1/01/08 ................................... 2,501
NEW YORK - 6.3%
4,025 Long Island Power Authority Electric System General Revenue
5.25%, due 12/01/26 .................................. 4,038
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
NEW YORK (CONTINUED)
New York City Municipal Water Finance Authority Water and
Sewer System Revenue
$2,205 6.00%, due 6/15/19 ................................. $ 2,234
2,100 5.00%, due 6/15/17 [FGIC] ............................ 2,100
New York Dormitory Authority State University Educational
Facilities Revenue
4,400 7.50%, due 5/15/11 ................................... 5,487
5,250 7.50%, due 5/15/13 ................................... 6,735
5,500 5.25%, due 5/15/15 ................................... 5,782
1,500 5.00%, due 7/01/15 ................................... 1,505
6,500 Urban Development Corp. Correctional Facilities Revenue
5.375%, due 1/01/25 .................................. 6,581
NORTH CAROLINA - 2.2%
11,000 North Carolina Eastern Municipal Power Agency Power System
Revenue
6.00%, due 1/01/22 .................................. 11,863
OKLAHOMA - 1.2%
5,590 McGee Creek Authority Water Revenue
6.00%, due 1/01/23 [MBIA] ............................ 6,418
PENNSYLVANIA - 0.9%
5,000 Centre County University Area Joint Authority Sewer Revenue
4.75%, due 11/01/20 [MBIA] ........................... 4,755
SOUTH CAROLINA - 1.2%
945 Charleston County Pollution Control Facilities Revenue
5.90%, due 8/01/03 ..................................... 946
5,500 Pickens and Richland Counties Hospital Facilities Revenue
5.75%, due 8/01/21 [AMBAC] ........................... 5,639
TEXAS - 10.0%
7,000 Austin Combined Utility Revenue
4.25%, due 5/15/28 [MBIA] ............................ 6,118
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 66 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
TEXAS (CONTINUED)
$10,000 Austin Combined Utility System Revenue
12.50%, due 11/15/07 [MBIA] ........................ $15,884
Austin Water, Sewer and Electric Revenue
20 / /14.00%, due 11/15/01 (Prerefunded 5/15/99@100) ....... 21
3,350 14.00%, due 11/15/01 (Prerefunded various dates) ..... 3,874
60 / /14.00%, due 11/15/01 (Escrowed to Maturity) .......... 64
1,535 / /Coastal Industrial Water Authority Water Revenue
5.50%, due 12/15/09 .................................. 1,569
2,000 Houston Water and Sewer System Junior Lien Revenue
5.375%, due 12/01/27 [FGIC] .......................... 2,059
15,000 Matagorda County Navigation District #1
5.15%, due 11/01/29 [MBIA] .......................... 14,953
2,260 Texas Municipal Power Agency Revenue
5.50%, due 9/01/13 [FGIC] ............................ 2,264
7,500 Waco Texas Health Facilities Development Corp. Hospital
Revenue
5.00%, due 11/01/25 .................................. 7,200
UTAH - 0.4%
1,900 Intermountain Power Agency Power Supply Revenue
6.00%, due 7/01/23 ................................... 1,918
VIRGINIA - 1.6%
1,055 / /Richmond Metropolitan Expressway Authority Revenue
5.60%, due 1/15/13 (Escrowed to Maturity) ............ 1,056
8,000 Upper Occoquan Sewage Authority Regional Sewerage System
Revenue
4.75%, due 7/01/29 [MBIA] ............................ 7,593
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
WASHINGTON - 13.5%
$7,000 CDP-King County III Lease Revenue (King Street Center
Project)
5.25%, due 6/01/26 [MBIA] ........................... $7,078
Douglas County Public Utility District #1 Wells
Hydroelectric Revenue
5,055 8.75%, due 9/01/18 ................................... 6,638
2,200 / /8.75%, due 9/01/18 (Prerefunded 9/01/06@106) ...... 2,965
2,500 Everett School District #2 Snohomish County Unlimited Tax
General Obligation
6.20%, due 12/01/12 [MBIA] ........................... 2,807
2,200 King County Housing Authority Pooled Housing Revenue
6.80%, due 3/01/26 ................................... 2,362
1,650 King County Limited Tax General Obligation (Various Purpose)
4.75%, due 1/01/19 ................................... 1,584
2,255 King County Public Hospital District #1 Hospital Facilities
Revenue (Valley Medical Center)
5.50%, due 9/01/17 [AMBAC] ........................... 2,296
4,800 Lewis County Public Utility District #1 Cowlitz Falls
Hydroelectric Project Revenue
6.00%, due 10/01/24 .................................. 5,031
4,000 Port of Seattle Revenue
6.00%, due 12/01/14 [AMBAC] .......................... 4,193
2,944 Seattle Housing Authority Low Income Housing Revenue (Mt
Zion Project)
6.60%, due 8/20/38 ................................... 3,285
5,940 Vancouver Washington Housing Authority Revenue (Springbrook
Square)
5.65%, due 3/01/31 ................................... 5,836
3,000 Washington Health Care Facilities Authority Revenue (Fred
Hutchinson Cancer Research Center)
7.375%, due 1/01/18 .................................. 3,249
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 67 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
WASHINGTON (CONTINUED)
$10,000 Washington Health Care Facilities Authority Revenue (Swedish
Hospital Medical Center)
5.25%, due 11/15/26 [AMBAC] ....................... $ 10,043
8,500 Washington Public Power Supply System Nuclear Project #1
Revenue
6.00%, due 7/01/17 ................................... 8,822
4,000 Washington Public Power Supply System Nuclear Project #2
Revenue
6.30%, due 7/01/12 ................................... 4,628
2,610 Washington Public Power Supply System Nuclear Project #3
Revenue
5.50%, due 7/01/18 ................................... 2,624
WISCONSIN - 0.2%
1,000 Wisconsin Health and Educational Facilities Authority
Revenue
6.00%, due 10/01/12 [MBIA] ........................... 1,019
WYOMING - 3.5%
18,375 Wyoming Community Development Authority Housing Revenue
5.60%, due 6/01/29 .................................. 18,873
------
TOTAL BONDS ......................................................... 536,754
------
TEMPORARY INVESTMENTS - 0.3%
INVESTMENT COMPANIES:
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
$1,431 Federated Tax-Exempt Money Market Fund, Inc. ...... $ 1,431
------
TOTAL TEMPORARY INVESTMENTS ........................................... 1,431
------
TOTAL INVESTMENTS - 99.3% ........................................... 538,185
Other Assets, less Liabilities ........................................ 3,996
------
NET ASSETS ......................................................... $542,181
------
------
- -----------------------------------------------------------------------------
</TABLE>
* The provider of the guarantee of timely payment of both principal and
interest is identified in the brackets at the end of each bond description.
The guarantors applicable to this portfolio and the percentage of the
portfolio they guarantee at the period end are as follows:
<TABLE>
<S> <C>
Municipal Bond Investors Assurance
Corp. [MBIA]....................... 16.0%
Financial Guaranty Insurance Corp.
[FGIC]............................. 10.9
AMBAC Indemnity Corp. [AMBAC]...... 8.9
Financial Security Assurance, Inc.
[FSA].............................. 2.5
----
38.3%
----
----
</TABLE>
/ /Prerefunded bonds are collateralized by securities (generally U.S. Treasury
Securities) held in an irrevocable trust in an amount sufficient to pay
interest and principal.
SEE NOTES TO FINANCIAL STATEMENTS
- 68 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO CALIFORNIA TAX-FREE INCOME FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the fourth quarter 1998, the SAFECO California Fund returned -0.29%* for
Class A shares and -0.44%* for Class B shares to its peer funds' 0.01%,
according to Lipper, Inc. For the year, the Fund delivered 5.73%* for Class A
shares and 4.98%* for Class B shares to the competition's 5.77%.
The Fund underperformed the Lehman Brothers Long Municipal Bond Index, which
returned 0.28% for the quarter and 6.90% for the year, but this is standard.
It's nearly impossible to beat a bond index because it has no expenses, no cash
and no call features.
Since yields rose slightly during the fourth quarter, the Fund underperformed
its peers over the three-month period. Our longer-than-average maturity
generally results in below-average returns when yields rise and prices fall.
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
1 YEAR 5 YEAR 10 YEAR 1 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C> <C> <C>
Class A 0.97% 5.71% 7.88% 5.73% 6.69% 8.38%
Class B (0.02)% 6.01% 8.20% 4.98% 6.32% 8.20%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
CALIFORNIA CALIFORNIA
TAX-FREE TAX-FREE LEHMAN BROTHERS
INCOME FUND INCOME FUND LONG MUNICIPAL
CLASS A CLASS B BOND INDEX
<S> <C> <C> <C>
12/31/88 9,550 10,000 10,000
01/31/89 9,779 10,240 10,235
02/28/89 9,638 10,092 10,092
03/31/89 9,633 10,087 10,100
04/30/89 9,857 10,321 10,397
05/31/89 10,058 10,532 10,637
06/30/89 10,165 10,644 10,799
07/31/89 10,282 10,766 10,942
08/31/89 10,157 10,635 10,776
09/30/89 10,153 10,632 10,743
10/31/89 10,252 10,735 10,885
11/30/89 10,434 10,927 11,116
12/31/89 10,496 10,991 11,198
01/31/90 10,380 10,869 11,085
02/28/90 10,507 11,001 11,210
03/31/90 10,487 10,981 11,221
04/30/90 10,328 10,814 11,084
05/31/90 10,644 11,146 11,397
06/30/90 10,746 11,253 11,509
07/31/90 10,951 11,467 11,712
08/31/90 10,678 11,181 11,434
09/30/90 10,663 11,165 11,416
10/31/90 10,932 11,447 11,658
11/30/90 11,188 11,714 11,953
12/31/90 11,228 11,757 12,006
01/31/91 11,399 11,936 12,167
02/28/91 11,433 11,973 12,252
03/31/91 11,408 11,946 12,282
04/30/91 11,585 12,131 12,472
05/31/91 11,698 12,249 12,619
06/30/91 11,641 12,190 12,595
07/31/91 11,820 12,377 12,790
08/31/91 11,983 12,547 12,973
09/30/91 12,201 12,776 13,162
10/31/91 12,332 12,914 13,299
11/30/91 12,263 12,841 13,315
12/31/91 12,637 13,233 13,632
01/31/92 12,594 13,187 13,624
02/28/92 12,597 13,190 13,646
03/31/92 12,598 13,192 13,680
04/30/92 12,690 13,288 13,811
05/31/92 12,882 13,489 14,013
06/30/92 13,135 13,754 14,284
07/31/92 13,579 14,219 14,807
08/31/92 13,319 13,946 14,609
09/30/92 13,415 14,046 14,674
10/31/92 13,041 13,657 14,429
11/30/92 13,470 14,105 14,835
12/31/92 13,648 14,291 15,027
01/31/93 13,790 14,440 15,169
02/28/93 14,415 15,094 15,874
03/31/93 14,221 14,891 15,683
04/30/93 14,429 15,109 15,898
05/31/93 14,489 15,171 16,029
06/30/93 14,759 15,455 16,331
07/31/93 14,740 15,434 16,347
08/31/93 15,155 15,869 16,766
09/30/93 15,339 16,061 16,999
10/31/93 15,338 16,061 17,031
11/30/93 15,100 15,812 16,825
12/31/93 15,453 16,182 17,259
01/31/94 15,684 16,423 17,463
02/28/94 15,272 15,991 16,884
03/31/94 14,500 15,184 15,876
04/30/94 14,449 15,129 15,999
05/31/94 14,584 15,271 16,186
06/30/94 14,444 15,125 15,992
07/31/94 14,779 15,475 16,403
08/31/94 14,774 15,470 16,437
09/30/94 14,399 15,077 16,056
10/31/94 14,051 14,712 15,563
11/30/94 13,791 14,441 15,152
12/31/94 14,032 14,693 15,690
01/31/95 14,676 15,367 16,380
02/28/95 15,393 16,119 17,047
03/31/95 15,518 16,249 17,252
04/30/95 15,449 16,177 17,244
05/31/95 16,320 17,089 17,978
06/30/95 15,821 16,567 17,646
07/31/95 15,892 16,641 17,737
08/31/95 16,142 16,903 17,987
09/30/95 16,266 17,034 18,128
10/31/95 16,699 17,486 18,567
11/30/95 17,312 18,128 19,046
12/31/95 17,700 18,534 19,343
01/31/96 17,636 18,467 19,426
02/28/96 17,412 18,232 19,189
03/31/96 16,895 17,691 18,838
04/30/96 16,744 17,532 18,762
05/31/96 16,759 17,549 18,772
06/30/96 17,088 17,893 19,061
07/31/96 17,284 18,099 19,250
08/31/96 17,241 18,053 19,225
09/30/96 17,654 18,486 19,651
10/31/96 17,871 18,702 19,891
11/30/96 18,353 19,179 20,319
12/31/96 18,153 18,958 20,197
01/31/97 17,958 18,743 20,156
02/28/97 18,165 18,949 20,374
03/31/97 17,759 18,513 20,022
04/30/97 18,027 18,782 20,258
05/31/97 18,371 19,129 20,651
06/30/97 18,644 19,395 20,915
07/31/97 19,615 20,377 21,677
08/31/97 19,179 19,929 21,388
09/30/97 19,441 20,188 21,696
10/31/97 19,604 20,346 21,883
11/30/97 19,794 20,531 22,078
12/31/97 20,202 20,941 22,482
01/31/98 20,414 21,147 22,722
02/28/98 20,370 21,089 22,711
03/31/98 20,348 21,050 22,743
04/30/98 20,106 20,787 22,620
05/31/98 20,606 21,292 23,063
06/30/98 20,678 21,353 23,162
07/31/98 20,691 21,353 23,216
08/31/98 21,094 21,756 23,631
09/30/98 21,422 22,081 23,960
10/31/98 21,279 21,923 23,883
11/30/98 21,442 22,082 24,005
12/31/98 21,359 21,984 24,029
</TABLE>
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 69 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE CALIFORNIA TAX-FREE FUND MANAGER
However, it helps us outperform when yields decline. Over the last one, three,
five and 10-years, our strategy of staying fully invested in long, deep-discount
bonds has paid off.
During 1998 the California Fund grew from $89 million to $114 million and I
carried more cash than I like as I waited for an attractive offering to appear.
I was able to add call protection to the Fund throughout the year by selling par
bonds and buying bonds at the deepest discounts available, but I never did find
any of the lower-rated, higher-yielding bonds at favorable spreads to high
grades that I favor. Perhaps next year. We ended this last one with an average
maturity of 25.3 years and 1.6% cash.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
<S> <C>
AAA: 67%
AA: 3%
A: 12%
BBB: 16%
Cash & Other: 2%
</TABLE>
Stephen C. Bauer
- -------------------------------
Stephen C. Bauer joined SAFECO in 1971 as a fixed-income analyst. He became a
fund manager with the inception of the SAFECO Municipal Bond Fund in 1981, and
is President of SAFECO Asset Management Company. Bauer holds a B.S. in
microbiology and an M.B.A. from the University of Washington.
HIGHLIGHTS
------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE TYPE OF BONDS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Local General Obligation - Limited Tax .............................. 16%
Utilities - Water .................................................... 12
Utilities - Sewer .................................................... 12
Lease Rental ......................................................... 10
Hospital .............................................................. 9
</TABLE>
CURRENT YIELD (30-DAY) CLASS A ......................................... 3.49%
CURRENT YIELD (30-DAY) CLASS B ......................................... 3.04%
WEIGHTED AVERAGE MATURITY ......................................... 25.3 YEARS
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
East Bay Municipal Utility Water
System Revenue ................................................... 5.0%
Thousand Oaks Certificates of Participation
Wastewater System Revenue ......................................... 4.6
Los Angeles Wastewater System
Revenue ........................................................... 4.4
Airports Commission City and County of
San Francisco International Airport Revenue 4.3
Sacramento City Financing Authority Lease
Revenue (Cal EPA Building) ........................................ 4.2
</TABLE>
- 70 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO CALIFORNIA TAX-FREE INCOME FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
BONDS* - 97.5%
$5,000 Airports Commission City and County of San Francisco
International Airport Revenue
4.90%, due 5/01/19
[MBIA] .............................................. $4,950
4,750 Arcade Water District Water Revenue
5.00%, due 11/01/27
[FGIC] ............................................... 4,714
4,000 California Educational Facilities Authority Revenue
(Institute of Technology)
4.50%, due 10/01/28 .................................. 3,696
California Health Facilities Financing Authority Insured
Health Facility Revenue (Catholic Health Care West)
4.75%, due 7/01/19
[MBIA] ............................................... 2,164
2,250
2,500 5.125%, due 7/01/24 .................................. 2,505
3,715 California Statewide Communities Development Authority
Certificates of Participation (Childrens Hospital of Los
Angeles)
4.75%, due 6/01/21
[MBIA] ............................................... 3,542
20 Concord Redevelopment Agency Tax Allocation Central Concord
Redevelopment Project
8.00%, due 7/01/18 ...................................... 21
3,750 Culver City Redevelopment Financing Authority Tax Allocation
Revenue
4.60%, due 11/01/20
[AMBAC] .............................................. 3,537
6,000 East Bay Municipal Utility District Water System Revenue
(Alameda and Contra Costa Countries)
4.75%, due 6/01/34
[MBIA] ............................................... 5,714
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
$4,195 Foothill/Eastern Transportation Corridor Agency Toll Road
Revenue
5.00%, due 1/01/35 .................................. $4,000
670 Inglewood Insured Hospital Revenue (Daniel Freeman Hospital)
6.75%, due 5/01/13 ..................................... 731
1,200 / /Los Angeles Convention and Exhibition Center Authority
Certificates of Participation
9.00%, due 12/01/20 (Prerefunded 12/01/05@100) ....... 1,569
3,800 Los Angeles Department of Water and Power Waterworks Revenue
4.75%, due 11/15/19 [FGIC] ........................... 3,673
5,000 Los Angeles Wastewater System Revenue
5.00%, due 6/01/28 [FGIC] ............................ 4,962
3,585 Metropolitan Water District of Southern California
Waterworks Revenue
5.00%, due 7/01/37 ................................... 3,531
Northern California Power Agency Geothermal Project Revenue
810 5.00%, due 7/01/09 ..................................... 810
1,690 / /5.00%, due 7/01/09 (Prerefunded 7/01/08@100) ...... 1,800
Palm Desert Financing Authority Tax Allocation Revenue
2,595 5.625%, due 4/01/23 [MBIA] ........................... 2,758
4,260 5.10%, due 10/01/27 [MBIA] ........................... 4,275
2,350 Palomar Pomerado Health System California Insured Revenue
4.75%, due 11/01/23 [MBIA] ........................... 2,235
4,435 Pittsburg Redevelopment Agency Los Medanos Community
Development Project Tax Allocation
4.625%, due 8/01/21 [AMBAC] .......................... 4,171
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 71 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO CALIFORNIA TAX-FREE INCOME FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
Pleasanton Joint Powers Financing Authority Reassessment
Revenue
$1,585 6.20%, due 9/02/17 .................................. $1,685
1,760 6.15%, due 9/02/12 ................................... 1,893
4,900 Redding Joint Powers Financing Authority Solid Waste and
Corporation Yard Revenue
5.00%, due 1/01/23 ................................... 4,780
2,000 Riverside County Certificates of Participation (Capital
Projects)
6.125%, due 11/01/21 ................................. 2,176
5,000 Sacramento City Financing Authority Lease Revenue (Cal EPA
Building)
4.75%, due 5/01/23 [AMBAC] ........................... 4,793
2,500 San Bernardino County Cerificates of Participation (Medical
Center Financing Project)
5.50%, due 8/01/24 ................................... 2,579
1,000 San Francisco Bay Area Rapid Transit District Revenue 5.00%,
due 7/01/28 [AMBAC] .................................... 994
4,000 San Gabriel Valley School Finance Authority Revenue (Pamona
Unified School District)
5.50%, due 2/01/24 ................................... 4,121
5,000 San Joaquin Hills Transportation Corridor Agency Senior Lien
Toll Road Revenue
5.00%, due 1/01/33 ................................... 4,788
4,000 San Jose Redevelopment Agency (Merged Area Redevelopment
Project Tax Allocation)
4.75%, due 8/01/22 ................................... 3,809
3,000 Santa Rosa Wastewater Revenue (Subregional Wastewater
Project)
5.00%, due 9/01/22 [FGIC] ............................ 2,979
1,335 Southern California Public Power Authority Power Project
Revenue (Multiple Projects)
5.50%, due 7/01/20 ................................... 1,347
900 Stanislaus Waste to Energy Financing Agency Solid Waste
Facility Revenue
7.625%, due 1/01/10 .................................... 941
State of California General Obligation Bonds
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
$2,500 5.625%, due 09/01/24 ................................ $2,666
1,075 5.625%, due 10/01/23 [FGIC] .......................... 1,137
5,335 Thousand Oaks Certificate of Participation Wastewater System
Revenue
4.875%, due 10/01/23 [FSA] ........................... 5,211
------
TOTAL BONDS ......................................................... 111,257
------
TEMPORARY INVESTMENTS - 1.6%
INVESTMENT COMPANIES:
1,830 SEI Tax Exempt Trust Institutional Tax Free
Portfolio ............................................ 1,830
------
TOTAL TEMPORARY INVESTMENTS ........................................... 1,830
------
TOTAL INVESTMENTS - 99.1% ........................................... 113,087
Other Assets, less Liabilities .......................................... 975
------
NET ASSETS ......................................................... $114,062
------
------
- -----------------------------------------------------------------------------
</TABLE>
* The provider of the guarantee of timely payment of both principal and
interest is identified in the brackets at the end of each bond description.
The guarantors applicable to this portfolio and the percentage of the
portfolios they guarantee at the period end are as follows:
<TABLE>
<S> <C>
Municipal Bond Investors Assurance
Corp. [MBIA]....................... 22.7%
Financial Guaranty Insurance Co.
[FGIC]............................. 15.4
AMBAC Indemnity Corp. [AMBAC]...... 11.9
Financial Security Assurance, Inc.
[FSA].............................. 4.6
----
54.6%
----
----
</TABLE>
/ /Prerefunded bonds are collateralized by securities (generally U.S. Treasury
Securities) held in an irrevocable trust in an amount sufficient to pay
interest and principal.
SEE NOTES TO FINANCIAL STATEMENTS
- 72 -
<PAGE>
REPORT FROM THE FUND MANAGER
THE SAFECO WASHINGTON STATE
MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The SAFECO Washington State Municipal Bond Fund returned 5.36%* for Class A
shares and 4.55%* for Class B shares, while Lipper, Inc.'s average Washington
State Municipal Bond Fund returned 5.78% for the year. For the fourth quarter
the Fund returned -0.35%* for Class A shares and -0.50%* for
[PHOTO OF BEVERLY R. DENNY]
Class B shares, while the peer group returned 0.04%. The Fund's longer duration
(sensitivity to interest rates) will typically cause the Fund to lag as rates
increase, and to outperform as rates fall and the market rallies as it did for
the year.
Lehman Brothers Long Municipal Bond Index shows three-
*Not including the effects of sales charges.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PERFORMANCE OVERVIEW -- CLASS A AND CLASS B SHARES
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED JUNE 30, 1998
WITH SALES CHARGE WITHOUT SALES CHARGE
SINCE SINCE
1 YEAR 5 YEAR INCEPTION* 1 YEAR 5 YEAR INCEPTION*
<S> <C> <C> <C> <C> <C> <C>
Class A 0.62% 4.27% 5.08% 5.36% 5.24% 5.93%
Class B -0.45% 4.57% 5.50% 4.55% 4.90% 5.63%
</TABLE>
<TABLE>
<CAPTION>
SAFECO SAFECO
WASHINGTON WASHINGTON
STATE STATE
MUNICIPAL MUNICIPAL LEHMAN BROTHERS
BOND FUND BOND FUND LONG MUNICIPAL
CLASS A CLASS B BOND INDEX
<S> <C> <C> <C>
03/31/93 $9,550 $10,000 $10,000
04/30/93 $9,612 $10,065 $10,137
05/31/93 $9,653 $10,107 $10,221
06/30/93 $9,885 $10,350 $10,413
07/31/93 $9,855 $10,319 $10,423
08/31/93 $10,123 $10,600 $10,690
09/30/93 $10,241 $10,723 $10,839
10/31/93 $10,259 $10,743 $10,859
11/30/93 $10,098 $10,573 $10,728
12/31/93 $10,303 $10,789 $11,005
01/31/94 $10,462 $10,955 $11,135
02/28/94 $10,104 $10,580 $10,766
03/31/94 $9,538 $9,988 $10,123
04/30/94 $9,584 $10,036 $10,201
05/31/94 $9,720 $10,177 $10,321
06/30/94 $9,553 $10,003 $10,197
07/31/94 $9,794 $10,255 $10,459
08/31/94 $9,759 $10,219 $10,481
09/30/94 $9,522 $9,971 $10,238
10/31/94 $9,268 $9,705 $9,923
11/30/94 $9,051 $9,478 $9,661
12/31/94 $9,412 $9,855 $10,004
01/31/95 $9,796 $10,257 $10,444
02/28/95 $10,166 $10,646 $10,870
03/31/95 $10,220 $10,700 $11,000
04/30/95 $10,189 $10,669 $10,995
05/31/95 $10,601 $11,101 $11,463
06/30/95 $10,408 $10,898 $11,252
07/31/95 $10,471 $10,965 $11,310
08/31/95 $10,607 $11,107 $11,469
09/30/95 $10,682 $11,186 $11,559
10/31/95 $10,914 $11,428 $11,839
11/30/95 $11,166 $11,693 $12,144
12/31/95 $11,284 $11,815 $12,333
01/31/96 $11,330 $11,864 $12,386
02/28/96 $11,225 $11,755 $12,235
03/31/96 $11,009 $11,528 $12,011
04/30/96 $10,949 $11,465 $11,963
05/31/96 $10,972 $11,488 $11,969
06/30/96 $11,099 $11,621 $12,154
07/31/96 $11,210 $11,739 $12,274
08/31/96 $11,178 $11,705 $12,258
09/30/96 $11,397 $11,934 $12,530
10/31/96 $11,494 $12,028 $12,683
11/30/96 $11,700 $12,248 $12,956
12/31/96 $11,619 $12,166 $12,878
01/31/97 $11,551 $12,087 $12,852
02/28/97 $11,661 $12,183 $12,991
03/31/97 $11,459 $11,976 $12,766
04/30/97 $11,604 $12,118 $12,917
05/31/97 $11,791 $12,293 $13,168
06/30/97 $11,915 $12,414 $13,336
07/31/97 $12,320 $12,828 $13,822
08/31/97 $12,156 $12,661 $13,638
09/30/97 $12,305 $12,794 $13,834
10/31/97 $12,372 $12,867 $13,953
11/30/97 $12,448 $12,938 $14,077
12/31/97 $12,622 $13,109 $14,335
01/31/98 $12,734 $13,216 $14,488
02/28/98 $12,749 $13,211 $14,481
03/31/98 $12,764 $13,219 $14,501
04/30/98 $12,678 $13,123 $14,423
05/31/98 $12,893 $13,338 $14,706
06/30/98 $12,945 $13,385 $14,769
07/31/98 $12,968 $13,411 $14,803
08/31/98 $13,172 $13,603 $15,068
09/30/98 $13,346 $13,774 $15,277
10/31/98 $13,260 $13,679 $15,228
11/30/98 $13,303 $13,717 $15,306
12/31/98 $13,298 $13,705 $15,321
</TABLE>
* The Fund's inception was March 18, 1993. Graph and average annual return
comparison begins March 31, 1993.
The performance graph compares a hypothetical $10,000 investment in Class A
and Class B of each Fund to a hypothetical investment in a relevant market
index. Fund performance is derived from the Fund's original class of shares
and reflects the maximum 4.5% sales charge for Class A shares, and the
maximum contingent deferred sales charge (5% in the first year, decreasing to
0% after six years) for Class B shares. Fund performance has not been
restated to reflect Rule 12b-1 fees prior to September 30, 1996 (initial
public offering date of Class A and Class B shares). Such fees will affect
subsequent performance.
The index is unmanaged and includes no operating expenses or transaction
costs. Past performance is not predictive of future results. Principal value
may fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
- 73 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE WASHINGTON MUNICIPAL BOND FUND MANAGER
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
<S> <C>
AAA: 47%
AA: 27%
A: 18%
Not Rated: 4%
Cash & Other: 4%
</TABLE>
month and one-year returns at 0.28% and 6.90%. It's virtually impossible for us
to beat this benchmark, as it is a national index, which has no expenses, cash
holdings nor call features.
I sold our Seattle Municipal Sewer Bonds in October. In November, I bought
some higher-yielding bonds issued by the Vancouver Housing Authority with a
5.65% coupon at a 5.75% yield. I later sold the Grant County PUDs to raise cash
for the Vancouver Bonds.
Beverly R. Denny
- -------------------------------
Beverly R. Denny came to SAFECO from T. Rowe Price in 1991. She holds an MBA
from the University of Virginia and a B.S. in finance/ economics from Babson
College. She is a Chartered Financial Analyst.
HIGHLIGHTS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE TYPE OF BONDS NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
Housing ................................................................ 23%
Local General Obligaton - Limited Tax ................................... 18
Hospital ................................................................ 14
University Revenue ...................................................... 11
Utilities - Water ........................................................ 9
</TABLE>
CURRENT YIELD (30-DAY) CLASS A ......................................... 2.49%
CURRENT YIELD (30-DAY) CLASS B ......................................... 2.04%
WEIGHTED AVERAGE MATURITY ......................................... 23.4 YEARS
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- ----------------------------------------------------------------------------
<S> <C>
Renton Limited Tax General Obligation ................................. 4.6%
Vancouver Washington Housing Authority Revenue (Clark County) .......... 4.4
Vancouver Washington Housing Authority Revenue (Springbrook Square) .... 4.2
Washington Higher Education Facilities Authority Revenue and Refunding
Revenue (Gonzaga Univerisity Project) ................................ 4.1
Washington State Housing Finance Commission Housing and Nonprofit
Revenue (Seattle University Auxiliary Service Project) ............... 4.0
</TABLE>
- 74 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
<C> <S>
- -----------------------------------------------------------------------------
BONDS* - 96.3%
$300 Bellingham Housing Authority Housing Revenue (Cascade
Meadows)
5.20%, due 11/1/27 [MBIA] ............................. $299
100 Kent Limited Tax General Obligation
5.75%, due 12/01/26 [MBIA] ............................. 108
300 King County Housing Authority Pooled Housing Revenue
6.80%, due 3/01/26 ..................................... 322
250 King County Limited Tax General Obligation (Various
Purposes)
4.75%, due 1/01/19 ..................................... 240
200 King County Public Hospital District #1 Hospital Facilities
Revenue (Valley Medical Center)
5.25%, due 9/01/15 [AMBAC] ............................. 205
200 Kitsap County School District #401 Unlimited Tax General
Obligation (Central Kitsap)
5.50%, due 12/01/11 .................................... 214
100 Kitsap County Sewer Revenue
5.75%, due 7/01/16 [MBIA] .............................. 108
250 Klickitat County Public Utility District #1 Electric Revenue
5.75%, due 10/01/27 [FGIC] ............................. 268
100 Lewis County Public Utility District #1 Cowlitz Falls
Hydroelectric Project Revenue
6.00%, due 10/01/24 .................................... 105
200 Municipality of Metropolitan Seattle General Obligation
5.65%, due 1/01/20 ..................................... 209
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
$350 Renton Limited Tax General Obligation
5.75%, due 12/01/17 [MBIA] ............................ $375
Seattle Drainage and Wastewater Utility Improvement Revenue
175 5.25%, due 12/01/25 [MBIA] ............................. 177
200 5.00%, due 11/01/27 .................................... 194
250 Seattle Housing Authority Low Income Housing Revenue (Mt.
Zion Project)
6.60%, due 8/20/38 ..................................... 279
300 Seattle Municipal Light and Power Revenue
5.00%, due 7/01/20 ..................................... 294
Seattle Water System Revenue
200 5.25%, due 12/01/23 .................................... 201
300 5.00%, due 10/01/27 [FGIC] ............................. 294
300 Spokane County General Obligation
5.10%, due 12/01/18 .................................... 302
100 Tacoma Sold Waste Utilities Revenue
5.50%, due 12/01/19 [AMBAC] ............................ 105
200 Tukwila Limited Tax General Obligation
5.90%, due 1/01/14 ..................................... 215
350 Vancouver Washington Housing Authority Revenue (Clark
County)
5.50%, due 3/1/28 ...................................... 355
350 Vancouver Washington Housing Authority Revenue (Springbrook
Square)
5.65%, due 3/01/31 ..................................... 344
100 Washington Certificates of Participation Municipal Lease
Obligation (State Office Building Project)
6.00%, due 4/01/12 ..................................... 105
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 75 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
$200 Washington Health Care Facilities Authority Revenue
(Franciscan Health System/St. Joseph Hospital and Health
Care Center, Tacoma)
5.625%, due 1/01/13 [MBIA] ............................ $213
150 Washington Health Care Facilities Authority Revenue (Grays
Harbor Medical Center)
5.90%, due 7/01/23 [Asset Guaranty] .................... 160
250 Washington Health Care Facilities Authority Revenue
(Highline Community Hospital)
5.00%, due 8/15/21 [Asset Guaranty] .................... 240
200 Washington Health Care Facilities Authority Revenue
(Northwest Hospital, Seattle)
5.75%, due 11/15/23 [AMBAC] ............................ 210
100 Washington Health Care Facilities Authority Revenue (Swedish
Hospital Medical System)
6.30%, due 11/15/22 [AMBAC] ............................ 111
250 Washington Higher Education Facilities Authority Revenue
(Pacific Lutheran University Project)
5.70%, due 11/01/26 [Connie Lee] 264
350 Washington Higher Education Facilities Authority Revenue and
Refunding Revenue (Gonzaga University Project)
4.75%, due 4/01/22 [MBIA] .............................. 331
325 Washington State Housing Finance Commission Housing and
Nonprofit Revenue (Seattle University Auxiliary Service
Project)
5.30%, due 7/01/31 ..................................... 323
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
$250 Washington State Housing Finance Commission Revenue (Horizon
House Project)
6.125%, due 7/01/27 [MBIA] ........................... $ 268
200 Washington State Various Purpose General Obligation
5.25%, due 1/01/19 ..................................... 203
200 Yakima-Tieton Irrigation District Revenue
6.20%, due 6/01/19 [FSA] ............................... 219
----
TOTAL BONDS ........................................................... 7,860
----
TEMPORARY INVESTMENTS - 4.7%
INVESTMENT COMPANIES:
387 Federated Tax-Exempt Money Market Fund, Inc. .......... 387
----
TOTAL TEMPORARY INVESTMENTS ............................................. 387
----
TOTAL INVESTMENTS - 101.0% ............................................ 8,247
Liabilities, Less Other Assets ......................................... (80)
----
NET ASSETS ........................................................... $8,167
----
----
- -----------------------------------------------------------------------------
</TABLE>
* The provider of the guarantee of timely payment of both principal and interest
is identified in the brackets at the end of each bond description. The
guarantors applicable to this portfolio and the percentage of the portfolios
they guarantee at period end are as follows:
<TABLE>
<S> <C>
Municipal Bond Investors
Assurance Corp. [MBIA] ............ 22.8%
AMBAC Indemnity Corp. [AMBAC]...... 7.7
Financial Guaranty Insurance Corp.
[FGIC]............................. 6.8
Asset Guaranty Insurance Co........ 4.9
Connie Lee Insurance Co............ 3.2
Financial Security Assurance, Inc.
[FSA].............................. 2.7
----
48.1%
----
----
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 76 -
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO MONEY MARKET FUND
December 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The SAFECO Money Market Fund returned 4.92%* for Class A shares and
4.76%* for Class B shares for the year, while the average money fund's
total return was 4.86%, according to Lipper, Inc. For the quarter ending
December 31, 1998, the Fund's average return was 1.24%* for Class A shares and
1.17%* for Class B shares, which surpassed the peer group's 1.14% return for the
same period. [PHOTO OF NAOMI URATA]
The increase in the Fund's yield is attributable to the purchase of one-year,
fixed-rate paper, resulting in an average maturity as long as 87 days during the
half-year compared to an average of 60 days for other funds in its peer group.
The longer maturity paper enabled the Fund to maintain yield as the Federal
Funds rate fell from 5.25% to 4.75%. The Federal Reserve lowered the rate twice
during the quarter. Short-term rates remain inverted from one day out to 270
days, so that one-day rates are at higher levels than 270-day rates. This
indicates that the market believes that future rates will be lower.
The Federal Reserve's easing mode was prompted by a slowing global economy,
the Asian crisis and declining liquidity in the financial markets. The
likelihood of further rate cuts is possible depending on the pace of growth of
the global economy, the financial health of emerging markets, and inflation. The
possibility exists that instead of slowing further, the U.S. economy could
continue growing at a healthy pace leading to higher rates. To hedge against
rising rates, I increased the amount of floating rate paper of corporations
priced off of one month LIBOR, the London Inter-bank Borrowing Rate. LIBOR
floaters trade cheap to boost the yield on the Fund compared to one-month
commercial paper with comparable credit ratings.
The most notable occurrence in 1998 was a huge flight to quality. The Fund
served as refuge for investors fleeing markets that are vulnerable to foreign
problems. Cash flow into the Fund was significant and so far, it has stayed. As
I've done in the past, I will work to manage the Fund to be a safe haven for
your
*Not including the effects of sales charges.
- 77 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT FROM THE MONEY MARKET MANAGER
investment dollar in spite of volatile market conditions. I will do this by
buying quality paper subject to careful credit review. I will lock in some
longer-term rates to provide stability and downside protection in case rates
decline, and I will maintain some short maturities in case rates move up. The
shorter maturities will also provide liquidity for your short-term cash needs.
Naomi Urata
- -------------------------------
Naomi Urata joined SAFECO in 1993 as a fixed-income analyst and began managing
the SAFECO Money Market Fund in August of 1994. She holds a Master in Management
from Yale University and is a Chartered Financial Analyst.
HIGHLIGHTS
- -------------------------------
7-DAY WEIGHTED AVERAGE MATURITY ...................................... 64 DAYS
TOTAL RETURN (1 YEAR) CLASS-A .......................................... 4.92%
TOTAL RETURN (1 YEAR) CLASS-B .......................................... 4.76%
- 78 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MONEY MARKET FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
SHORT-TERM CORPORATE SECURITIES* - 99.1%
ASSET BACKED - 2.6%
$ 6,000 Ciesco L.P.
5.35%, due 1/19/99 ................................. $ 5,987
BANKS (FOREIGN) - 8.8%
National Australia Funding (DE), Inc.
5,000 5.45%, due 1/08/99 ................................... 4,997
6,000 5.38%, due 1/19/99 ................................... 5,987
9,000 Societe Generale, NY
5.67%, due 8/06/99 ................................... 8,998
BANKS (MAJOR REGIONAL) - 13.2%
10,000 BancBoston
5.58%, due 3/01/99 .................................. 10,000
8,000 *Fleet Credit Card, L.L.C.
5.89%, due 4/15/99 ................................... 8,008
12,000 *MBNA America Bank NA
5.75%, due 6/28/99 .................................. 12,000
BANKS (REGIONAL) - 3.1%
7,100 *American Express Centurion Bank
5.48%, due 1/14/99 ................................... 7,100
FINANCE (AUTO) - 12.9%
Ford Motor Credit Co.
5,100 5.625%, due 1/15/99 .................................. 5,100
5,000 5.51%, due 1/21/99 ................................... 4,987
General Motors Acceptance Corp.
4,800 7.50%, due 6/01/99 ................................... 4,832
6,500 5.80%, due 1/07/99 ................................... 6,497
Hyundai Motors
4,900 5.75%, due 1/11/99 ................................... 4,895
3,000 5.60%, due 1/19/99 ................................... 2,993
FINANCE (CONSUMER) - 3.8%
8,612 Associates Corp. of North America
5.15%, due 1/04/99 ................................... 8,612
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
FINANCE (DIVERSIFIED & BUSINESS) - 12.5%
$11,750 Aristar, Inc.
6.75%, due 5/15/99 ................................. $11,800
5,000 General Electric Capital Corp.
5.30%, due 1/22/99 ................................... 4,987
8,500 Heller Financial, Inc.
6.64%, due 5/13/99 ................................... 8,522
3,000 International Lease Finance Corp.
5.75%, due 1/15/99 ................................... 3,000
FINANCE (MORTGAGE CO.) - 3.7%
Countrywide Funding
3,250 8.41%, due 11/17/99 .................................. 3,337
5,000 5.50%, due 1/06/99 ................................... 4,998
HEALTH CARE (LONG TERM CARE) - 0.7%
1,550 *+Bowie Assisted Living L.L.C.
5.55%, due 7/01/23, put date 1/06/99 ................. 1,550
HOME BUILDING - 3.1%
7,033 *+Summer Station Apartments, L.L.C.
5.63%, due 6/01/19, put date 1/06/99 ................. 7,033
INVESTMENTS (BANK/BROKERAGE) - 15.9%
8,000 CS First Boston Group, Inc.
5.715%, due 7/19/99 .................................. 8,003
8,000 #*Goldman Sachs and Company (144A)
5.35%, due 9/14/99 (acquired 4/08/98) ................ 8,000
8,100 *Morgan Stanley, Dean Witter, Discover and Co.
5.66%, due 3/13/01 ................................... 8,100
*Shearson Lehman Brothers Holdings, Inc.
4,000 6.92%, due 6/01/99 ................................... 4,021
8,000 5.69%, due 5/23/01 ................................... 8,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 79 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MONEY MARKET FUND
As of December 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
MUNI'S (MUNICIPALITIES) - 3.7%
$8,500 City of St. Paul Minnesota
5.30%, due 3/30/99 .................................. $8,500
MUNI'S (STATES) - 0.9%
2,085 *+Maryland Health and Higher Education Facilities Authority
5.50%, due 1/01/28, put date 1/06/99 ................. 2,085
MUNI'S (TAXABLE) - 4.7%
3,600 *+Business Finance Authority of the State of New Hampshire
5.60%, due 6/01/28, put date 1/07/99 ................. 3,600
5,000 *+Village Green Finance Co. L.L.C.
5.63%, due 11/01/22, put date 1/06/99 ................ 5,000
2,000 *+Wake Forest University
5.62%, due 7/01/17, put date 1/07/99 ................. 2,000
RETAIL (GENERAL MERCHANDISE) - 3.5%
8,000 *+Racetrac Capital, L.L.C.
5.63%, due 4/01/18, put date 1/06/99 ................. 8,000
TOBACCO - 6.0%
B.A.T. Capital Corp.
5,000 5.70%, due 1/04/99 ................................... 5,000
6,000 5.50%, due 1/26/99 ................................... 5,980
2,671 Philip Morris Cos., Inc.
7.375%, due 2/15/99 .................................. 2,676
------
TOTAL SHORT-TERM CORPORATE SECURITIES ............................... 225,185
------
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -----------------------------------------------------------------------------
<C> <S>
U.S. GOVERNMENT AND AGENCY SECURITIES - 0.2%
Federal National Mortgage Association Discount Notes
$500 5.96%, due 7/23/99 ................................. $ 502
------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES ............................. 502
------
TOTAL INVESTMENTS - 99.3% ........................................... 225,687
Other Assets, less Liabilities ........................................ 1,642
------
NET ASSETS ......................................................... $227,329
------
------
- -----------------------------------------------------------------------------
</TABLE>
+ If a Put date is indicated, the Fund has a right to sell a specified
underlying security at an exercise price equal to the amortized cost of the
underlying security plus interest, if any, as of that date.
# 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 market value of such security is $8,000,000 and
represents 3.5% of net assets.
* Securities have variable rates which change periodically based on specified
market rates or indices. Rates shown are those in effect on December 31, 1998.
SEE NOTES TO FINANCIAL STATEMENTS
- 80 -
<PAGE>
This page left blank intentionally.
- 81 -
<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
- 82 -
<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
- 83 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1998
<TABLE>
<CAPTION>
SAFECO
INTERMEDIATE-
SAFECO TERM SAFECO
(In Thousands, Except Per-Share HIGH-YIELD U.S. TREASURY MANAGED
Amounts) BOND FUND FUND BOND FUND
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments, at Cost $ 82,028 $ 24,357 $ 7,792
------------- ------------- -------------
------------- ------------- -------------
Investments, at Value $ 81,458 $ 25,425 $ 7,896
Receivables
Investment Securities Sold -- -- --
Trust Shares Sold 1,289 1 10
Interest 1,616 321 75
Deferred Organization Expense -- -- 1
------------- ------------- -------------
Total Assets 84,363 25,747 7,982
LIABILITIES
Payables
Investment Securities Purchased -- -- 253
Trust Shares Redeemed 71 6 10
Dividends 175 39 138
Investment Advisory Fees 50 13 3
Organization Expense -- -- 1
Other 26 7 2
------------- ------------- -------------
Total Liabilities 322 65 407
------------- ------------- -------------
NET ASSETS $ 84,041 $ 25,682 $ 7,575
------------- ------------- -------------
------------- ------------- -------------
NO-LOAD CLASS:
Net Assets $ 79,696 $ 24,061 $ 6,757
Trust Shares Outstanding 9,072 2,240 782
------------- ------------- -------------
Net Asset Value, Offering Price,
and Redemption Price Per Share $ 8.78 $ 10.74 $ 8.64
------------- ------------- -------------
------------- ------------- -------------
CLASS A:
Net Assets $ 2,964 $ 833 $ 295
Trust Shares Outstanding 338 77 34
------------- ------------- -------------
Net Asset Value and Redemption
Price Per Share $ 8.78 $ 10.75 $ 8.65
------------- ------------- -------------
------------- ------------- -------------
Maximum Offering Price Per Share
(Net Asset Value Plus Sales
Charge of 4.5%) $ 9.19 $ 11.26 $ 9.06
------------- ------------- -------------
------------- ------------- -------------
CLASS B:
Net Assets $ 1,381 $ 788 $ 523
Trust Shares Outstanding 157 73 61
------------- ------------- -------------
Net Asset Value and Offering Price
Per Share* $ 8.78 $ 10.74 $ 8.64
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
* For Class B shares, the redemption price per share may be lower as a result
of applying contingent deferred sales charge.
** Also represents offering price per share.
SEE NOTES TO FINANCIAL STATEMENTS
- 84 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO CALIFORNIA WASHINGTON STATE SAFECO
MUNICIPAL TAX-FREE MUNICIPAL BOND MONEY MARKET
BOND FUND INCOME FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at Cost $ 473,615 $ 104,127 $ 7,772 $ 225,687
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
Investments, at Value $ 538,185 $ 113,087 $ 8,247 $ 225,687
Receivables
Investment Securities Sold -- -- -- --
Trust Shares Sold 118 122 -- 2,603
Interest 8,426 1,755 124 1,830
Deferred Organization Expense -- -- -- --
------------- ------------- ----------------- -----------------
Total Assets 546,729 114,964 8,371 230,120
LIABILITIES
Payables
Investment Securities Purchased -- -- -- --
Trust Shares Redeemed 1502 215 1 2,555
Dividends 2,791 615 196 29
Investment Advisory Fees 206 57 5 105
Organization Expense -- -- -- --
Other 49 15 2 102
------------- ------------- ----------------- -----------------
Total Liabilities 4,548 902 204 2,791
------------- ------------- ----------------- -----------------
NET ASSETS $ 542,181 $ 114,062 $ 8,167 $ 227,329
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
NO-LOAD CLASS:
Net Assets $ 539,860 $ 112,457 $ 7,712 $ 224,473
Trust Shares Outstanding 37,373 8,830 715 224,473
------------- ------------- ----------------- -----------------
Net Asset Value, Offering Price,
and Redemption Price Per Share $ 14.45 $ 12.74 $ 10.78 $ 1.00
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
CLASS A:
Net Assets $ 946 $ 678 $ 209 $ 2,186
Trust Shares Outstanding 65 53 19 2,186
------------- ------------- ----------------- -----------------
Net Asset Value and Redemption
Price Per Share $ 14.45 $ 12.74 $ 10.79 $ 1.00**
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
Maximum Offering Price Per Share
(Net Asset Value Plus Sales
Charge of 4.5%) $ 15.13 $ 13.34 $ 11.30 --
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
CLASS B:
Net Assets $ 1,375 $ 927 $ 246 $ 670
Trust Shares Outstanding 95 73 23 670
------------- ------------- ----------------- -----------------
Net Asset Value and Offering Price
Per Share* $ 14.43 $ 12.73 $ 10.80 $ 1.00
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
* For Class B shares, the redemption price per share may be lower as a result
of applying contingent deferred sales charge.
** Also represents offering price per share.
SEE NOTES TO FINANCIAL STATEMENTS
- 85 -
<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
- 86 -
<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
- 87 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
SAFECO
INTERMEDIATE-
SAFECO TERM SAFECO
HIGH-YIELD U.S. TREASURY MANAGED
(In Thousands) BOND FUND FUND BOND FUND
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 7,005 $ 1,231 $ 353
Dividends 104 -- --
------------- ------------- -------------
Total Investment Income 7,109 1,231 353
EXPENSES
Investment Advisory 507 109 30
Transfer Agent 124 37 4
Shareholder Service - Class A 4 1 1
- Class B 2 2 1
Distribution - Class B 5 5 2
Legal and Auditing 15 15 15
Custodian 6 2 2
Reports to Shareholders 20 6 2
Trustees 6 5 5
Interest 19 -- --
Amortization of Organization
Expenses -- -- 6
Other 18 4 7
------------- ------------- -------------
Total Expenses 726 186 75
------------- ------------- -------------
NET INVESTMENT INCOME 6,383 1,045 278
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net Realized Gain (Loss) on
Investments (57) 4 237
Net Change in Unrealized
Appreciation (Depreciation) (2,997) 648 (56)
------------- ------------- -------------
NET GAIN (LOSS) ON INVESTMENTS (3,054) 652 181
------------- ------------- -------------
NET CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS $ 3,329 $ 1,697 $ 459
------------- ------------- -------------
------------- ------------- -------------
- --------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 88 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO CALIFORNIA WASHINGTON STATE SAFECO
MUNICIPAL TAX-FREE MUNICIPAL BOND MONEY MARKET
BOND FUND INCOME FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 28,591 $ 5,668 $ 447 $ 11,571
Dividends -- -- -- --
------------- ------------- ----------------- -----------------
Total Investment Income 28,591 5,668 447 11,571
EXPENSES
Investment Advisory 2,164 587 53 1,013
Transfer Agent 325 81 3 482
Shareholder Service - Class A 2 1 1 --
- Class B 2 2 1 --
Distribution - Class B 6 6 2 --
Legal and Auditing 24 17 16 17
Custodian 26 8 2 16
Reports to Shareholders 38 9 1 30
Trustees 8 6 5 6
Interest -- 9 -- 2
Amortization of Organization
Expenses -- -- -- --
Other 55 14 4 18
------------- ------------- ----------------- -----------------
Total Expenses 2,650 740 88 1,584
------------- ------------- ----------------- -----------------
NET INVESTMENT INCOME 25,941 4,928 359 9,987
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net Realized Gain (Loss) on
Investments 8,894 3,251 246 --
Net Change in Unrealized
Appreciation (Depreciation) (3,043) (1,778) (133) --
------------- ------------- ----------------- -----------------
NET GAIN (LOSS) ON INVESTMENTS 5,851 1,473 113 --
------------- ------------- ----------------- -----------------
NET CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS $ 31,792 $ 6,401 $ 472 $ 9,987
------------- ------------- ----------------- -----------------
------------- ------------- ----------------- -----------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 89 -
<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
- 90 -
<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
- 91 -
<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
- 92 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO SMALL COMPANY FUND
---------------------------
SAFECO BALANCED FUND
---------------------------
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
SAFECO U.S. VALUE FUND
---------------------------
PERIOD ENDED
YEAR ENDED 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
- 93 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SAFECO HIGH-YIELD BOND FUND
------------------------------
YEAR ENDED DECEMBER 31
------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 6,383 $ 5,097
Net Realized Gain (Loss) on
Investments and Foreign
Currency Transactions (57) 954
Net Change in Unrealized
Appreciation (Depreciation) (2,997) 1,194
------------ ---------------
Net Change in Net Assets
Resulting from Operations 3,329 7,245
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No Load Class (6,205) (5,073)
- Class A (127) (11)
- Class B (51) (13)
Net Realized Gain on Investments
- No Load Class -- --
- Class A -- --
- Class B -- --
------------ ---------------
Total (6,383) (5,097)
NET TRUST SHARE TRANSACTIONS
No-Load Class 11,564 18,821
Class A 2,818 155
Class B 1,041 250
------------ ---------------
Total 15,423 19,226
------------ ---------------
TOTAL CHANGE IN NET ASSETS 12,369 21,374
NET ASSETS AT BEGINNING OF PERIOD 71,672 50,298
------------ ---------------
NET ASSETS AT END OF PERIOD $ 84,041 $ 71,672
------------ ---------------
------------ ---------------
- -------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 94 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO INTERMEDIATE-TERM
U.S. TREASURY FUND SAFECO MANAGED BOND FUND SAFECO MUNICIPAL BOND 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) $ 1,045 $ 886 $ 278 $ 227 $ 25,941 $ 25,677
Net Realized Gain (Loss) on
Investments and Foreign
Currency Transactions 4 (57) 237 (21) 8,894 6,632
Net Change in Unrealized
Appreciation (Depreciation) 648 416 (56) 163 (3,043) 17,239
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS 1,697 1,245 459 369 31,792 49,548
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No Load Class (992) (844) (262) (216) (25,876) (25,652)
- Class A (26) (30) (9) (7) (33) (17)
- Class B (27) (12) (7) (4) (32) (8)
Net Realized Gain on Investments
- No Load Class -- -- (192) -- (8,852) (5,345)
- Class A -- -- (8) -- (16) (4)
- Class B -- -- (15) -- (22) (4)
------------ ------------ ------------ ------------ ------------ ------------
TOTAL (1,045) (886) (493) (227) (34,831) (31,030)
NET TRUST SHARE TRANSACTIONS
No-Load Class 7,754 674 2,153 280 39,941 3,479
Class A 450 (346) 151 2 557 66
Class B 331 202 412 14 884 382
------------ ------------ ------------ ------------ ------------ ------------
TOTAL 8,535 530 2,716 296 41,382 3,927
------------ ------------ ------------ ------------ ------------ ------------
TOTAL CHANGE IN NET ASSETS 9,187 889 2,682 438 38,343 22,445
NET ASSETS AT BEGINNING OF PERIOD 16,495 15,606 4,893 4,455 503,838 481,393
------------ ------------ ------------ ------------ ------------ ------------
NET ASSETS AT END OF PERIOD $ 25,682 $ 16,495 $ 7,575 $ 4,893 $ 542,181 $ 503,838
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 95 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SAFECO CALIFORNIA TAX-FREE
INCOME FUND
------------------------------
YEAR ENDED DECEMBER 31
------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 4,928 $ 3,764
Net Realized Gain (Loss) on
Investments and Foreign
Currency Transactions 3,251 367
Net Change in Unrealized
Appreciation (Depreciation) (1,778) 4,618
------------ ---------------
Net Change in Net Assets
Resulting from Operations 6,401 8,749
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No Load Class (4,878) (3,744)
- Class A (24) (9)
- Class B (26) (11)
Net Realized Gain on Investments
- No Load Class (3,208) (360)
- Class A (19) (2)
- Class B (27) (2)
------------ ---------------
Total (8,182) (4,128)
NET TRUST SHARE TRANSACTIONS
No-Load Class 25,835 11,712
Class A 232 326
Class B 436 374
------------ ---------------
Total 26,503 12,412
------------ ---------------
TOTAL CHANGE IN NET ASSETS 24,722 17,033
NET ASSETS AT BEGINNING OF PERIOD 89,340 72,307
------------ ---------------
NET ASSETS AT END OF PERIOD $ 114,062 $ 89,340
------------ ---------------
------------ ---------------
- -------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 96 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO WASHINGTON STATE
MUNICIPAL BOND FUND SAFECO MONEY MARKET FUND
--------------------------- ---------------------------
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
--------------------------- ---------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net Investment Income (Loss) $ 359 $ 349 $ 9,987 $ 8,347
Net Realized Gain (Loss) on
Investments and Foreign
Currency Transactions 246 (9) -- --
Net Change in Unrealized
Appreciation (Depreciation) (133) 321 -- --
------------ ------------ ------------ ------------
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS 472 661 9,987 8,347
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income - No Load Class (343) (326) (9,906) (8,324)
- Class A (9) (15) (57) (15)
- Class B (7) (8) (24) (8)
Net Realized Gain on Investments
- No Load Class (224) -- -- --
- Class A (6) -- -- --
- Class B (7) -- -- --
------------ ------------ ------------ ------------
TOTAL (596) (349) (9,987) (8,347)
NET TRUST SHARE TRANSACTIONS
No-Load Class 541 440 47,850 15,267
Class A (149) 11 1,649 243
Class B 12 19 256 307
------------ ------------ ------------ ------------
TOTAL 404 470 49,755 15,817
------------ ------------ ------------ ------------
TOTAL CHANGE IN NET ASSETS 280 782 49,755 15,817
NET ASSETS AT BEGINNING OF PERIOD 7,887 7,105 177,574 161,757
------------ ------------ ------------ ------------
NET ASSETS AT END OF PERIOD $ 8,167 $ 7,887 $ 227,329 $ 177,574
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- 97 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
This financial report is on the 15 SAFECO Mutual Funds that issue Class A and
Class B shares (collectively, "Advisor Classes"). Each Fund is a series of one
of the following trusts (each a "Trust") listed below. Each Trust is registered
under the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company.
SAFECO Common Stock Trust
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Income Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Balanced Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
SAFECO Taxable Bond Trust
SAFECO High-Yield Bond Fund
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO Managed Bond Trust
SAFECO Managed Bond Fund
SAFECO Tax-Exempt Bond Trust
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
SAFECO Money Market Trust
SAFECO Money Market Fund
Effective September 30, 1996, certain SAFECO Mutual Funds began issuing two
new classes of shares--Class A and Class B shares. These classes of shares are
sold by financial advisors to shareholders and have associated sales and
distribution charges, unlike the no-load class of shares (which are sold
directly to the shareholder with no associated sales or distribution charges).
Each class of shares represents an interest in the net assets of the fund.
In connection with issuing the Advisor Classes, the Funds adopted a Plan of
Distribution (the "Plan"). Under the Plan, each Advisor
- 98 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Class (with the exception of the Money Market Fund Advisor Classes) 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 Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
SECURITY VALUATION. Investments in equity securities are valued at the last
reported sales price, unless there are no transactions in which case they are
valued at the last reported bid price. Bonds are stated on the basis of
valuations provided by a pricing service, which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. When valuations are not readily available, securities are
valued at fair value as determined in good faith by the board of trustees.
Temporary investments are valued at amortized cost which approximates market.
SECURITY TRANSACTIONS. Security transactions are recorded on the trade date.
The cost of the portfolios is the same for financial statement and federal
income tax purposes. Realized gains and losses from security transactions are
determined using the identified cost basis.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS. Securities purchased on a
when-issued or delayed basis for the Taxable Bond Trust, Managed Bond Trust and
Tax-Exempt Bond Trust may be settled a month or more after the trade date. The
securities purchased are carried in the portfolio at market and are subject to
market fluctuation during this
- 99 -
<PAGE>
- --------------------------------------------
- --------------------------------------------
NOTES TO FINANCIAL STATEMENTS
period. These securities begin earning interest on the settlement date. As
commitments to purchase when-issued securities become fixed, the Funds segregate
liquid assets in an amount equal to the total obligation.
INCOME RECOGNITION. Dividend income less foreign taxes withheld (if any) for
the Common Stock Trust is recorded on the ex-dividend date or upon receipt of
ex-dividend notification in the case of certain foreign securities. Bond
premiums and original issue discounts are amortized to either call or maturity
dates for the Managed Bond Trust, Tax-Exempt Bond Trust and Money Market Trust.
Market discount on bonds purchased after April 30, 1993 is recorded as taxable
income at disposition for the Tax-Exempt Bond Trust. Interest is accrued on
bonds and temporary investments and bonds daily.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. For the Growth, Northwest,
International, and Small Company Funds, net investment income (if any) is
declared as a dividend to shareholders as of the last business day (ex-dividend
date) of December. For the Equity, Income, Balanced, and U.S. Value Funds, net
investment income (if any) is distributed as of the last business day of March,
June, September and December. Net investment income for the Taxable Bond Trust,
Managed Bond Trust, Tax-Exempt Bond Trust and Money Market Trust is declared as
a dividend to shareholders as of the close of each business day and payment is
made as of the last business day of each month. Net realized gains on
investments, if any, are normally distributed to shareholders at the end of
December.
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. In addition, the Tax-Exempt Bond Trust
intends to satisfy conditions
- 100 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
which will enable them to pay dividends which, for shareholders, are exempt from
Federal income taxes. Any portion of dividends representing net short-term
capital gains, however, is not exempt and is treated as taxable dividends for
Federal income tax purposes. In addition, income which is derived from
amortization on bonds purchased below their issued price after April 30, 1993,
is treated as ordinary income for Federal income tax purposes.
FOREIGN CURRENCY TRANSLATION. The accounting records of the International
Fund are maintained in U.S. dollars. All assets and liabilities initially
expressed in foreign currencies are converted into U.S. dollars at prevailing
exchange rates. Purchases and sales of investment securities, and dividend and
interest income, are translated at the rates of exchange prevailing on the
respective dates of such transactions. The International Fund does not isolate
that portion of the results of operations resulting from changes in foreign
exchange rates on investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments. Reported net realized
gains or losses from foreign currency transactions arise from gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest, and foreign withholding
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
- 101 -
<PAGE>
- --------------------------------------------
- --------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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.
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
High-Yield Bond Fund 58,682 47,905
Intermediate-Term U.S. Treasury Fund 6,847 519
Managed Bond Fund 10,173 7,691
Municipal Bond Fund 141,849 105,293
California Tax-Free Income Fund 58,237 35,723
Washington State Municipal Fund 4,417 4,690
- --------------------------------------------------------------------
</TABLE>
* Excludes short-term securities. Purchases include $6,131, $6,847, and $5,904
of U.S. Government Securities for Balanced, Intermediate-Term U.S. Treasury,
and Managed Bond Funds, respectively.
** Excludes short-term securities. Sales include $5,045, $519, and $4,734 of
U.S. Government Securities for Balanced, Intermediate-Term U.S. Treasury, and
Managed Bond Funds, respectively.
- 102 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
This page left blank intentionally.
- 103 -
<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>
- 104 -
<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>
- 105 -
<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>
- 106 -
<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.
- 107 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
4. TRUST SHARE TRANSACTIONS (Continued)
<TABLE>
<CAPTION>
SAFECO HIGH-YIELD BOND 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 9,834 12,582 319 17 138 27
Reinvestments 466 361 11 -- 5 1
Redemptions (9,014) (10,838) (21) -- (25) (1)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 1,286 2,105 309 17 118 27
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 88,489 $ 111,904 $ 2,907 $ 154 $ 1,223 $ 250
Reinvestments 4,195 3,231 94 1 44 6
Redemptions (81,120) (96,314) (183) -- (226) (6)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 11,564 $ 18,821 $ 2,818 $ 155 $ 1,041 $ 250
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO INTERMEDIATE-TERM U.S. TREASURY 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 1,506 1,013 50 23 76 26
Reinvestments 53 40 2 2 2 1
Redemptions (837) (987) (10) (59) (47) (7)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 722 66 42 (34) 31 20
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 16,057 $ 10,245 $ 539 $ 228 $ 799 $ 264
Reinvestments 561 405 20 22 23 8
Redemptions (8,864) (9,976) (109) (596) (491) (70)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 7,754 $ 674 $ 450 $ (346) $ 331 $ 202
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 108 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SAFECO MANAGED BOND 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 329 426 31 -- 48 14
Reinvestments 18 18 1 -- 2 --
Redemptions (103) (410) (15) -- (3) (12)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 244 34 17 -- 47 2
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 2,905 $ 3,587 $ 271 $ -- $ 420 $ 116
Reinvestments 157 150 10 2 15 --
Redemptions (909) (3,457) (130) -- (23) (102)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 2,153 $ 280 $ 151 $ 2 $ 412 $ 14
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO MUNICIPAL BOND 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 7,648 6,119 41 11 59 26
Reinvestments 1,598 1,399 2 1 3 1
Redemptions (6,515) (7,278) (4) (8) (1) --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 2,731 240 39 4 61 27
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 111,887 $ 86,342 $ 596 $ 159 $ 859 $ 377
Reinvestments 23,242 19,883 26 15 41 5
Redemptions (95,188) (102,746) (65) (108) (16) --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 39,941 $ 3,479 $ 557 $ 66 $ 884 $ 382
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 109 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
4. TRUST SHARE TRANSACTIONS (Continued)
<TABLE>
<CAPTION>
SAFECO CALIFORNIA TAX-FREE 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 4,348 2,478 28 25 41 31
Reinvestments 494 231 2 -- 3 --
Redemptions (2,846) (1,772) (12) -- (10) (1)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 1,996 937 18 25 34 30
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 56,554 $ 30,780 $ 366 $ 324 $ 522 $ 376
Reinvestments 6,359 2,862 25 2 39 3
Redemptions (37,078) (21,930) (159) -- (125) (5)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 25,835 $ 11,712 $ 232 $ 326 $ 436 $ 374
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO WASHINGTON STATE MUNICIPAL BOND 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 284 599 1 -- -- 2
Reinvestments 13 6 1 1 1 --
Redemptions (247) (563) (15) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 50 42 (13) 1 1 2
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 3,139 $ 6,398 $ 7 $ -- $ 3 $ 15
Reinvestments 137 63 7 11 9 4
Redemptions (2,735) (6,021) (163) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 541 $ 440 $ (149) $ 11 $ 12 $ 19
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 110 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SAFECO MONEY MARKET 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 491,508 321,481 3,057 944 1,672 469
Reinvestments 9,260 7,782 51 9 17 3
Redemptions (452,918) (313,996) (1,459) (710) (1,433) (165)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE 47,850 15,267 1,649 243 256 307
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
AMOUNTS:
Sales $ 491,508 $ 321,481 $ 3,057 $ 944 $ 1,672 $ 469
Reinvestments 9,260 7,782 51 9 17 3
Redemptions (452,918) (313,996) (1,459) (710) (1,433) (165)
------------ ------------ ------------ ------------ ------------ ------------
NET CHANGE $ 47,850 $ 15,267 $ 1,649 $ 243 $ 256 $ 307
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 111 -
<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 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 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)* --
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
Foreign Currency 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
Foreign Currency 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
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>
- 112 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HIGH-YIELD INTERMEDIATE-TERM MANAGED MUNICIPAL
(In Thousands) BOND FUND U.S TREASURY FUND BOND FUND BOND FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Gross Unrealized
Appreciation on Investments in
Which There Is an Excess of Value
Over Identified Cost $ 1,624 $ 1,109 $ 116 $ 65,045
Aggregate Gross Unrealized
Depreciation on Investents in
Which There Is an Excess of
Identified Cost Over Value (2,194) (41) (12) (475)
----------- ---------- -------------- --------------
NET UNREALIZED APPRECIATION/
(DEPRECIATION) (570) 1,068 104 64,570
ACCUMULATED NET REALIZED (LOSS) ON
INVESTMENT TRANSACTIONS (396)** (249)** -- --
PAID IN CAPITAL (PAR VALUE $.001,
UNLIMITED SHARES AUTHORIZED) 85,007 24,863 7,471 477,611
----------- ---------- -------------- --------------
NET ASSETS AT DECEMBER 31, 1998 $ 84,041 $ 25,682 $ 7,575 $ 542,181
----------- ---------- -------------- --------------
----------- ---------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
WASHINGTON
CALIFORNIA STATE
TAX-FREE MUNICIPAL BOND MONEY MARKET
INCOME FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Gross Unrealized
Appreciation on Investments in
Which There Is an Excess of Value
Over Identified Cost $ 9,125 $ 476 $ --
Aggregate Gross Unrealized
Depreciation on Investents in
Which There Is an Excess of
Identified Cost Over Value (165) (1) --
---------- -------------- --------------
NET UNREALIZED APPRECIATION 8,960 475 --
PAID IN CAPITAL (PAR VALUE $.001,
UNLIMITED SHARES AUTHORIZED) 105,102 7,692 227,329
---------- -------------- --------------
NET ASSETS AT DECEMBER 31, 1998 $ 114,062 $ 8,167 $ 227,329
---------- -------------- --------------
---------- -------------- --------------
- --------------------------------------------------------------------------------------------------------------
</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 represented 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
High-Yield Bond Fund 396 2004-2006
Intermediate-Term U.S. Treasury Fund 249 2001-2005
</TABLE>
- 113 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONSWITH AFFILIATES
INVESTMENT ADVISORY FEES. SAFECO Asset Management Company receives investment
advisory fees from the Funds. These fees are based on a percentage of each day's
net assets, which, on an annual basis, are as follows:
<TABLE>
<S> <C>
EQUITY, INCOME AND GROWTH FUNDS: 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: INTERMEDIATE-TERM U.S. TREASURY FUND:
First $250 million .85% First $250 million .55%
Next $250 million .75 Next $250 million .45
Over $500 million .65 Next $250 million .35
Over $750 million .25
HIGH-YIELD BOND AND WASHINGTON FUNDS: MANAGED BOND FUND:
First $250 million .65% First $100 million .50%
Next $250 million .55 Next $150 million .40
Next $250 million .45 Over $250 million .35
Over $750 million .35
MUNICIPAL AND CALIFORNIA FUNDS: MONEY MARKET FUND:
First $100 million .55% First $250 million .50%
Next $150 million .45 Next $250 million .40
Next $250 million .35 Next $250 million .30
Over $500 million .25 Over $750 million .25
</TABLE>
- 114 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 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,
500,000 shares (21%) of the Intermediate-Term U.S. Treasury Fund and 502,372
shares (67%) of the Washington Municipal Bond Fund. During the same period
SAFECO Asset Management Company owned 688,169 shares (45%) of the International
Fund, 519,268 shares (30%) of the Balanced Fund, 500,000 shares (56%) of the
U.S. Value Fund, and 452,103 shares (52%) of the Managed Bond Fund.
DEFERRED ORGANIZATION EXPENSE. Costs related to the organization of the
International, Balanced, Small Company, U.S. Value, and Managed Bond Funds have
been deferred and are being amortized to operations over a period of sixty
months. These costs were advanced by an affiliate and are being reimbursed by
the Fund 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.
- 115 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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
High-Yield Bond Fund 9,068
Intermediate-Term U.S. Treasury Fund 1,496
Managed Bond Fund 1,217
Municipal Bond Fund 1,774
California Tax-Free Income Fund 1,937
Washington State Municipal Bond Fund 5
- -----------------------------------------------------
</TABLE>
- 116 -
<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
OF
(In Thousands) SHARES AT SHARES AT 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.
- 117 -
<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.
- 118 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO GROWTH FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 22.39 $ 16.97 $ 15.45
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.05) (0.02) (0.02)
Net Realized and Unrealized Gain on
Investments 1.05 8.44 1.77
------ ------ ------
Total from Investment Operations 1.00 8.42 1.75
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- --
Distributions from Realized Gains (0.73) (3.00) (0.23)
------ ------ ------
Total Distributions (0.73) (3.00) (0.23)
------ ------ ------
NET ASSET VALUE AT END
OF PERIOD $ 22.66 $ 22.39 $ 16.97
------ ------ ------
------ ------ ------
TOTAL RETURN+ 4.47% 49.61% 11.35%*
NET ASSETS AT END OF PERIOD (000'S) $ 33,712 $ 4,076 $ 187
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.00% 1.06% 1.12%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.40%) (.33%) (.58%)**
PORTFOLIO TURNOVER RATE 54.58% 82.57% 82.93%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 119 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO GROWTH FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 22.19 $ 16.94 $ 15.45
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.15) (0.08) (0.05)
Net Realized and Unrealized Gain on
Investments 0.90 8.33 1.77
------ ------ ------
Total from Investment Operations 0.75 8.25 1.72
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- --
Distributions from Realized Gains (0.73) (3.00) (0.23)
------ ------ ------
Total Distributions (0.73) (3.00) (0.23)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 22.21 $ 22.19 $ 16.94
------ ------ ------
------ ------ ------
TOTAL RETURN+ 3.38% 48.70% 11.15%*
NET ASSETS AT END OF PERIOD (000'S) $ 15,569 $ 1,402 $ 116
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.91% 1.88% 1.87%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.28%) (1.16%) (1.38%)**
PORTFOLIO TURNOVER RATE 54.58% 82.57% 82.93%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 120 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO EQUITY FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 19.55 $ 16.62 $ 15.85
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.18 0.14 0.04
Net Realized and Unrealized Gain on
Investments 4.65 3.77 1.35
------ ------ ------
Total from Investment Operations 4.83 3.91 1.39
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.18) (0.14) (0.04)
Distributions from Realized Gains (0.93) (0.84) (0.58)
------ ------ ------
Total Distributions (1.11) (0.98) (0.62)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 23.27 $ 19.55 $ 16.62
------ ------ ------
------ ------ ------
TOTAL RETURN+ 24.77% 23.56% 8.78%*
NET ASSETS AT END OF PERIOD (000'S) $ 50,354 $ 7,247 $ 2,894
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.88% 1.24% 0.97%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 0.89% 0.74% 1.38%**
PORTFOLIO TURNOVER RATE 32.94% 34.26% 59.34%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 121 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO EQUITY FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 19.55 $ 16.60 $ 15.85
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.03) 0.02 0.02
Net Realized and Unrealized Gain on
Investments 4.56 3.79 1.33
------ ------ ------
Total from Investment Operations 4.53 3.81 1.35
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- (0.02) (0.02)
Distributions from Realized Gains (0.93) (0.84) (0.58)
------ ------ ------
Total Distributions (0.93) (0.86) (0.60)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 23.15 $ 19.55 $ 16.60
------ ------ ------
------ ------ ------
TOTAL RETURN+ 23.16% 22.93% 8.50%*
NET ASSETS AT END OF PERIOD (000'S) $ 17,232 $ 3,565 $ 355
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.94% 1.81% 1.75%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.21%) 0.12% 0.51%**
PORTFOLIO TURNOVER RATE 32.94% 34.26% 59.34%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 122 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INCOME FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 24.02 $ 21.15 $ 20.03
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.48 0.51 0.12
Net Realized and Unrealized Gain on
Investments 0.81 4.98 1.65
------ ------ ------
Total from Investment Operations 1.29 5.49 1.77
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.48) (0.51) (0.12)
Distributions from Realized Gains (1.28) (2.11) (0.53)
------ ------ ------
Total Distributions (1.76) (2.62) (0.65)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 23.55 $ 24.02 $ 21.15
------ ------ ------
------ ------ ------
TOTAL RETURN+ 5.38% 26.15% 8.85%*
NET ASSETS AT END OF PERIOD (000'S) $ 2,073 $ 742 $ 193
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.34% 1.14% 1.03%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 2.16% 2.50% 2.66%**
PORTFOLIO TURNOVER RATE 46.14% 52.14% 37.84%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 123 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INCOME FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 23.95 $ 21.12 $ 20.03
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.30 0.38 0.10
Net Realized and Unrealized Gain on
Investments 0.90 4.94 1.62
------ ------ ------
Total from Investment Operations 1.20 5.32 1.72
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.30) (0.38) (0.10)
Distributions from Realized Gains (1.28) (2.11) (0.53)
------ ------ ------
Total Distributions (1.58) (2.49) (0.63)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 23.57 $ 23.95 $ 21.12
------ ------ ------
------ ------ ------
TOTAL RETURN+ 5.03% 25.35% 8.60%*
NET ASSETS AT END OF PERIOD (000'S) $ 2,176 $ 798 $ 112
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.08% 1.83% 1.79%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 1.45% 1.79% 1.99%**
PORTFOLIO TURNOVER RATE 46.14% 52.14% 37.84%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 124 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO NORTHWEST FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 17.25 $ 14.06 $ 13.78
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.16) (0.06) (0.01)
Net Realized and Unrealized Gain on
Investments 0.66 4.39 0.29
------ ------ ------
Total from Investment Operations 0.50 4.33 0.28
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- --
Distributions from Realized Gains (0.19) (1.14) --
------ ------ ------
Total Distributions (0.19) (1.14) --
------ ------ ------
NET ASSET VALUE AT END
OF PERIOD $ 17.56 $ 17.25 $ 14.06
------ ------ ------
------ ------ ------
TOTAL RETURN+ 2.87% 30.79% 2.03%*
NET ASSETS AT END OF PERIOD (000'S) $ 2,208 $ 1,354 $ 369
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.70% 1.42% 1.40%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.06%) (.61%) (.39%)**
PORTFOLIO TURNOVER RATE 50.40% 55.42% 67.32%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 125 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO NORTHWEST FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 17.09 $ 14.03 $ 13.78
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.23) (0.10) (0.03)
Net Realized and Unrealized Gain on
Investments 0.64 4.30 0.28
------ ------ ------
Total from Investment Operations 0.41 4.20 0.25
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- --
Distributions from Realized Gains (0.19) (1.14) --
------ ------ ------
Total Distributions (0.19) (1.14) --
------ ------ ------
NET ASSET VALUE AT END
OF PERIOD $ 17.31 $ 17.09 $ 14.03
------ ------ ------
------ ------ ------
TOTAL RETURN+ 2.37% 29.93% 1.81%*
NET ASSETS AT END OF PERIOD (000'S) $ 2,603 $ 1,204 $ 232
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.30% 2.09% 2.18%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.66%) (1.30%) (1.19%)**
PORTFOLIO TURNOVER RATE 50.40% 55.42% 67.32%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 126 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERNATIONAL FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.55 $ 11.29 $ 10.39
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income (Loss) (.02) 0.20 --
Net Realized and Unrealized Gain on
Investments and Foreign Currency
Transactions 1.60 0.29 0.95
------ ------ ------
Total from Investment Operations 1.58 0.49 0.95
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- (0.21) (0.05)
Distributions from Realized Gains -- (0.02) --
------ ------ ------
Total Distributions -- (0.23) (0.05)
------ ------ ------
NET ASSET VALUE AT END
OF PERIOD $ 13.13 $ 11.55 $ 11.29
------ ------ ------
------ ------ ------
TOTAL RETURN+ 13.68% 4.30% 9.19%*
NET ASSETS AT END OF PERIOD (000'S) $ 629 $ 295 $ 154
RATIO OF EXPENSES TO AVERAGE NET
ASSETS++ 2.14% 1.87% 1.41%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (.47%) 0.26% (.23%)**
PORTFOLIO TURNOVER RATE 25.62% 22.13% 18.51%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would have been 2.31%, 2.13% and 1.72% for
the year or period ended December 31, 1998, 1997 and 1996, respectively.
- 127 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERNATIONAL FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.53 $ 11.28 $ 10.39
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income (.11) 0.18 --
Net Realized and Unrealized Gain on
Investments and Foreign Currency
Transactions 1.57 0.22 0.93
------ ------ ------
Total from Investment Operations 1.46 0.40 0.93
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- (0.13) (0.04)
Distributions from Realized Gains -- (0.02) --
------ ------ ------
Total Distributions -- (0.15) (0.04)
------ ------ ------
NET ASSET VALUE AT END
OF PERIOD $ 12.99 $ 11.53 $ 11.28
------ ------ ------
------ ------ ------
TOTAL RETURN+ 12.66% 3.48% 8.96%*
NET ASSETS AT END OF PERIOD (000'S) $ 777 $ 331 $ 112
RATIO OF EXPENSES TO AVERAGE NET
ASSETS++ 3.02% 2.64% 2.17%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.33%) 0.51% (1.15%)**
PORTFOLIO TURNOVER RATE 25.62% 22.13% 18.51%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would have been 3.19%, 2.90% and 2.47% for
the year or period ended December 31, 1998, 1997 and 1996, respectively.
- 128 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO BALANCED FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.60 $ 10.69 $ 10.38
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.25 0.28 0.09
Net Realized and Unrealized Gain on
Investments 1.14 1.45 0.44
------ ------------- ------
Total from Investment Operations 1.39 1.73 0.53
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.25) (0.28) (0.09)
Distributions from Realized Gains (0.51) (0.54) (0.13)
------ ------------- ------
Total Distributions (0.76) (0.82) (0.22)
------ ------------- ------
NET ASSET VALUE AT END
OF PERIOD $ 12.23 $ 11.60 $ 10.69
------ ------------- ------
------ ------------- ------
TOTAL RETURN+ 12.06% 16.29% 5.07%*
NET ASSETS AT END OF PERIOD (000'S) $ 893 $ 205 $ 110
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.67% 1.52% 1.35%++**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 2.23% 2.55% 3.01%**
PORTFOLIO TURNOVER RATE 74.76% 101.22% 36.10%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.70%.
- 129 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO BALANCED FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.60 $ 10.70 $ 10.38
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.15 0.18 0.06
Net Realized and Unrealized Gain on
Investments 1.15 1.44 0.45
------ ------------- ------
Total from Investment Operations 1.30 1.62 0.51
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.15) (0.18) (0.06)
Distributions from Realized Gains (0.51) (0.54) (0.13)
------ ------------- ------
Total Distributions (0.66) (0.72) (0.19)
------ ------------- ------
NET ASSET VALUE AT END
OF PERIOD $ 12.24 $ 11.60 $ 10.70
------ ------------- ------
------ ------------- ------
TOTAL RETURN+ 11.30% 15.21% 4.85%*
NET ASSETS AT END OF PERIOD (000'S) $ 2,056 $ 331 $ 115
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.34% 2.28% 2.11%++**
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 1.55% 1.78% 2.23%**
PORTFOLIO TURNOVER RATE 74.76% 101.22% 36.10%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.46%.
- 130 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO SMALL COMPANY FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 14.21 $ 11.81 $ 11.51
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.08) (0.06) (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments (3.04) 2.80 0.31
------------- ------------- ------
Total from Investment Operations (3.12) 2.74 0.30
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- -- --
Distributions from Realized Gains -- (0.34) --
------------- ------------- ------
Total Distributions -- (0.34) --
------------- ------------- ------
NET ASSET VALUE AT END OF PERIOD $ 11.09 $ 14.21 $ 11.81
------------- ------------- ------
------------- ------------- ------
TOTAL RETURN+ (21.96%) 23.21% 2.61%*
NET ASSETS AT END OF PERIOD (000'S) $ 1,220 $ 271 $ 135
RATIO OF EXPENSES TO AVERAGE NET ASSETS (1.66%) (1.52%) 1.42%++**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.99%) (.60%) (.50%)**
PORTFOLIO TURNOVER RATE 90.23% 60.81% 73.47%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 1.62%.
- 131 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO SMALL COMPANY FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 14.07 $ 11.79 $ 11.51
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.15) (0.10) (0.04)
Net Realized and Unrealized Gain
(Loss) on Investments (3.04) 2.72 0.32
------------- ------------- ------
Total from Investment Operations (3.19) 2.62 0.28
LESS DISTRIBUTIONS
Dividends from Net Investment Income -- -- --
Distributions from Realized Gains -- (0.34) --
------------- ------------- ------
Total Distributions -- (0.34) --
------------- ------------- ------
NET ASSET VALUE AT END OF PERIOD $ 10.88 $ 14.07 $ 11.79
------------- ------------- ------
------------- ------------- ------
TOTAL RETURN+ (22.67%) 22.23% 2.43%*
NET ASSETS AT END OF PERIOD (000'S) $ 1,034 $ 396 $ 103
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.64% 2.29% 2.18%++**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (1.91%) (1.35%) (1.28%)**
PORTFOLIO TURNOVER RATE 90.23% 60.81% 73.47%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets would have been 2.41%.
- 132 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO U.S. VALUE FUND
CLASS A
<TABLE>
<CAPTION>
APRIL 30, 1997
FOR THE YEAR (COMMENCEMENT OF
ENDED OPERATIONS)
DECEMBER 31 TO DECEMBER 31
---------------------------------
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.18 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.05 0.08
Net Realized and Unrealized Gain on
Investments 1.27 1.65
------ -------
Total from Investment Operations 1.32 1.73
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.05) (0.08)
Distributions from Realized Gains (0.52) (0.47)
------ -------
Total Distributions (0.57) (0.55)
------ -------
NET ASSET VALUE AT END OF PERIOD $ 11.93 $ 11.18
------ -------
------ -------
TOTAL RETURN+ 11.79% 17.24%*
NET ASSETS AT END OF PERIOD (000'S) $ 210 $ 133
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.07% 1.48%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 0.18% 1.03%**
PORTFOLIO TURNOVER RATE 55.15% 36.37%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 133 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO U.S. VALUE FUND
CLASS B
<TABLE>
<CAPTION>
APRIL 30, 1997
FOR THE YEAR (COMMENCEMENT OF
ENDED OPERATIONS)
DECEMBER 31 TO DECEMBER 31
---------------------------------
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.18 $ 10.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income
(Loss) (0.03) 0.02
Net Realized and Unrealized Gain on
Investments 1.28 1.65
------ ------
Total from Investment Operations 1.25 1.67
LESS DISTRIBUTIONS
Dividends from
Net Investment Income -- (0.02)
Distributions from Realized Gains (0.52) (0.47)
------ ------
Total Distributions (0.52) (0.49)
------ ------
NET ASSET VALUE AT END OF PERIOD $ 11.91 $ 11.18
------ ------
------ ------
TOTAL RETURN+ 11.18% 16.63%*
NET ASSETS AT END OF PERIOD (000'S) $ 628 $ 221
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.59% 2.29%**
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS (0.35%) 0.20%**
PORTFOLIO TURNOVER RATE 55.15% 36.37%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 134 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO HIGH-YIELD BOND FUND
CLASS A
<TABLE>
<CAPTION>
FOR THE YEAR ELEVEN-MONTH
ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31++
------------------------------
1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.12 $ 8.83
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.72 0.69
Net Realized and Unrealized Gain
(Loss) on Investments (0.34) 0.29
------ ------
Total from Investment Operations 0.38 0.98
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.72) (0.69)
------ ------
NET ASSET VALUE AT END OF PERIOD $ 8.78 $ 9.12
------ ------
------ ------
TOTAL RETURN+ 4.32% 12.49%*
NET ASSETS AT END OF PERIOD (000'S) $ 2,964 $ 259
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.12% 1.10%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 8.11% 7.65%**
PORTFOLIO TURNOVER RATE 64.22% 85.06%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ For the period from January 31, 1997 (initial issue date of Class A and
Class B shares) through December 31, 1997.
- 135 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO HIGH-YIELD BOND FUND
CLASS B
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31 DECEMBER 31++
------------------------------
1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.12 $ 8.83
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.64 0.63
Net Realized and Unrealized Gain
(Loss) on Investments (0.34) 0.29
------ ------
Total from Investment Operations 0.30 0.92
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.64) (0.63)
------ ------
NET ASSET VALUE AT END OF PERIOD $ 8.78 $ 9.12
------ ------
------ ------
TOTAL RETURN+ 3.39% 11.77%*
NET ASSETS AT END OF PERIOD (000'S) $ 1,381 $ 355
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.06% 1.81%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 7.15% 6.87%**
PORTFOLIO TURNOVER RATE 64.22% 85.06%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ For the period from January 31, 1997 (initial issue date of Class A and
Class B shares) through December 31, 1997.
- 136 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.35 $ 10.11 $ 10.10
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.52 0.55 0.15
Net Realized and Unrealized Gain on
Investments 0.40 0.24 0.01
------ ------ ------
Total from Investment Operations 0.92 0.79 0.16
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.52) (0.55) (0.15)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 10.75 $ 10.35 $ 10.11
------ ------ ------
------ ------ ------
TOTAL RETURN+ 9.08% 8.03% 1.63%*
NET ASSETS AT END OF PERIOD (000'S) $ 833 $ 365 $ 704
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.40% 1.32% 1.07%**++
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.84% 5.36% 6.07%**
PORTFOLIO TURNOVER RATE 2.83% 82.36% 125.42%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets for the period ended December 31,
1996 would have been 1.30%.
- 137 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.35 $ 10.12 $ 10.10
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.45 0.48 0.14
Net Realized and Unrealized Gain on
Investments 0.39 0.23 0.02
------ ------ ------
Total from Investment Operations 0.84 0.71 0.16
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.45) (0.48) (0.14)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 10.74 $ 10.35 $ 10.12
------ ------ ------
------ ------ ------
TOTAL RETURN+ 8.30% 7.27% 1.55%*
NET ASSETS AT END OF PERIOD (000'S) $ 788 $ 432 $ 223
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.00% 1.87% 1.72%**++
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.28% 4.78% 5.35%**
PORTFOLIO TURNOVER RATE 2.83% 82.36% 125.42%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Absent the reimbursements, the annualized
ratio of expenses to average net assets for the period ended December 31,
1996 would have been 1.95%.
- 138 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.60 $ 8.35 $ 8.35
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.37 0.39 0.11
Net Realized and Unrealized Gain on
Investments 0.30 0.25 --
------ ------ ------
Total from Investment Operations 0.67 0.64 0.11
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.37) (0.39) (0.11)
Distributions from Realized Gains (0.25) -- --
------ ------ ------
Total Distributions (0.62) (0.39) (0.11)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 8.65 $ 8.60 $ 8.35
------ ------ ------
------ ------ ------
TOTAL RETURN+ 7.87% 7.78% 1.34%*
NET ASSETS AT END OF PERIOD (000'S) $ 295 $ 146 $ 140
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.86% 1.45% 1.30%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.09% 4.68% 5.22%**
PORTFOLIO TURNOVER RATE 132.76% 176.50% 136.29%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 139 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.60 $ 8.35 $ 8.35
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.28 0.32 0.09
Net Realized and Unrealized Gain on
Investments 0.29 0.25 --
------ ------ ------
Total from Investment Operations 0.57 0.57 0.09
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.28) (0.32) (0.09)
Distributions from Realized Gains (0.25) -- --
------ ------ ------
Total Distributions (0.53) (0.32) (0.09)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 8.64 $ 8.60 $ 8.35
------ ------ ------
------ ------ ------
TOTAL RETURN+ 6.67% 6.91% 1.15%*
NET ASSETS AT END OF PERIOD (000'S) $ 523 $ 120 $ 100
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.89% 2.23% 2.07%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.07% 3.79% 4.45%**
PORTFOLIO TURNOVER RATE 132.76% 176.50% 136.29%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 140 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MUNICIPAL BOND FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 14.53 $ 13.99 $ 13.82
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.66 0.68 0.18
Net Realized and Unrealized Gain on
Investments 0.16 0.70 0.17
------ ------ ------
Total from Investment Operations 0.82 1.38 0.35
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.66) (0.68) (0.18)
Distributions from Realized Gains (0.24) (0.16) --
------ ------ ------
Total Distributions (0.90) (0.84) (0.18)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 14.45 $ 14.53 $ 13.99
------ ------ ------
------ ------ ------
TOTAL RETURN+ 5.75% 10.17% 2.52%*
NET ASSETS AT END OF PERIOD (000'S) $ 946 $ 390 $ 311
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.98% 0.95% 0.82%**
RATIO OF NET INVESTMENT INCOMETO AVERAGE
NET ASSETS 4.51% 4.86% 5.04%**
PORTFOLIO TURNOVER RATE 20.80% 13.52% 6.66%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 141 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MUNICIPAL BOND FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 14.52 $ 13.98 $ 13.82
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.57 0.60 0.15
Net Realized and Unrealized Gain on
Investments 0.15 0.70 0.16
------ ------ ------
Total from Investment Operations 0.72 1.30 0.31
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.57) (0.60) (0.15)
Distributions from Realized Gains (0.24) (0.16) --
------ ------ ------
Total Distributions (0.81) (0.76) (0.15)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 14.43 $ 14.52 $ 13.98
------ ------ ------
------ ------ ------
TOTAL RETURN+ 5.08% 9.56% 2.27%*
NET ASSETS AT END OF PERIOD (000'S) $ 1,375 $ 502 $ 112
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.61% 1.53% 1.50%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.89% 4.22% 4.42%**
PORTFOLIO TURNOVER RATE 20.80% 13.52% 6.66%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 142 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 12.94 $ 12.23 $ 12.07
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.55 0.58 0.15
Net Realized and Unrealized Gain on
Investments 0.17 0.76 0.19
------ ------ ------
Total from Investment Operations 0.72 1.34 0.34
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.55) (0.58) (0.15)
Distributions from Realized Gains (0.37) (0.05) (0.03)
------ ------ ------
Total Distributions (0.92) (0.63) (0.18)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 12.74 $ 12.94 $ 12.23
------ ------ ------
------ ------ ------
TOTAL RETURN+ 5.73% 11.29% 2.83%*
NET ASSETS AT END OF PERIOD (000'S) $ 678 $ 460 $ 122
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.04% 0.91% 0.89%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.25% 4.52% 4.84%**
PORTFOLIO TURNOVER RATE 38.78% 9.83% 10.52%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 143 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT BEGINNING OF PERIOD $ 12.93 $ 12.22 $ 12.07
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.46 0.48 0.12
Net Realized and Unrealized Gain on
Investments 0.17 0.76 0.18
------ ------ ------
Total from Investment Operations 0.63 1.24 0.30
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.46) (0.48) (0.12)
Distributions from Realized Gains (0.37) (0.05) (0.03)
------ ------ ------
Total Distributions (0.83) (0.53) (0.15)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 12.73 $ 12.93 $ 12.22
------ ------ ------
------ ------ ------
TOTAL RETURN+ 4.98% 10.46% 2.56%*
NET ASSETS AT END OF PERIOD (000'S) $ 927 $ 501 $ 101
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.76% 1.63% 1.64%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.45% 3.71% 4.08%**
PORTFOLIO TURNOVER RATE 38.78% 9.83% 10.52%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 144 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. Financial Highlights (For a Share Outstanding Throughout the Period)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.95 $ 10.53 $ 10.45
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.42 0.46 0.12
Net Realized and Unrealized Gain on
Investments 0.16 0.42 0.09
------ ------ ------
Total from Investment Operations 0.58 0.88 0.21
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.42) (0.46) (0.12)
Distributions from Realized Gains (0.32) -- (0.01)
------ ------ ------
Total Distributions (0.74) (0.46) (0.13)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 10.79 $ 10.95 $ 10.53
------ ------ ------
------ ------ ------
TOTAL RETURN+ 5.36% 8.64% 1.94%*
NET ASSETS AT END OF PERIOD (000'S) $ 209 $ 360 $ 336
RATIO OF EXPENSES TO AVERAGE
NET ASSETS 1.67% 1.32% 1.31%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.88% 4.39% 4.49%**
PORTFOLIO TURNOVER RATE 33.18% 11.67% 15.96%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 145 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.97 $ 10.55 $ 10.45
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.34 0.38 0.10
Net Realized and Unrealized Gain on
Investments 0.15 0.42 0.11
------ ------ ------
Total from Investment Operations 0.49 0.80 0.21
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.34) (0.38) (0.10)
Distributions from Realized Gains (0.32) -- (0.01)
------ ------ ------
Total Distributions (0.66) (0.38) (0.11)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 10.80 $ 10.97 $ 10.55
------ ------ ------
------ ------ ------
TOTAL RETURN+ 4.55% 7.75% 1.94%*
NET ASSETS AT END OF PERIOD (000'S) $ 246 $ 239 $ 211
RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.39% 2.13% 2.06%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 3.13% 3.58% 3.71%**
PORTFOLIO TURNOVER RATE 33.18% 11.67% 15.96%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
- 146 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MONEY MARKET FUND
CLASS A
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05 0.01
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.05) (0.05) (0.01)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
------ ------ ------
------ ------ ------
TOTAL RETURN 4.92% 4.97% 1.21%*
NET ASSETS AT END OF PERIOD (000'S) $ 2,186 $ 537 $ 295
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.92% 0.72% 0.55%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.87% 4.91% 5.01%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
- 147 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
10. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MONEY MARKET FUND
CLASS B
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
FOR THE YEAR ENDED DECEMBER 31 DECEMBER 31
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.05 0.05 0.01
LESS DISTRIBUTIONS
Dividends from
Net Investment Income (0.05) (0.05) (0.01)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
------ ------ ------
------ ------ ------
TOTAL RETURN 4.76% $4.94% 1.21%*
NET ASSETS AT END OF PERIOD (000'S) $ 670 $ 414 $ 106
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.05% 0.78% 0.54%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.71% 4.85% 4.96%**
</TABLE>
- --------------------------------------------------------------------------------
* Not annualized.
** Annualized.
- 148 -
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of the
SAFECO Common Stock Trust, SAFECO Taxable Bond Trust,
SAFECO Managed Bond Trust, SAFECO Tax-Exempt Bond Trust,
and SAFECO Money Market Trust
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, 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), the
SAFECO Taxable Bond Trust (comprising, respectively, the SAFECO High-Yield Bond
Fund, and SAFECO Intermediate-Term U.S. Treasury Fund), the SAFECO Managed Bond
Trust (comprising the Managed Bond Fund), the SAFECO Tax-Exempt Bond Trust
(comprising, respectively, the SAFECO Municipal Bond Fund, SAFECO California
Tax-Free Income Fund, and SAFECO Washington State Municipal Bond Fund), and the
SAFECO Money Market Trust (comprising, respectively, the SAFECO Money Market
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 Trusts' 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.
- 149 -
<PAGE>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective funds of the SAFECO Common Stock Trust, the SAFECO Taxable
Bond Trust, the SAFECO Managed Bond Trust, the SAFECO Tax-Exempt Bond Trust, and
the SAFECO Money Market Trust as listed above at December 31, 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
- 150 -
<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 MUTUAL FUNDS
BOARD OF TRUSTEES:
Boh A. Dickey, Chairman
Barbara J. Dingfield
David F. Hill
Richard W. Hubbard
Richard E. Lundgren
Larry L. Pinnt
John W. Schneider
OFFICERS:
David F. Hill, President
Ronald L. Spaulding
Vice President and Treasurer
Neal A. Fuller
Vice President and Controller
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: 1-800-528-6501
DEAF AND HARD OF HEARING
TTY/TDD SERVICE: 1-800-438-8718
*All telephone calls are tape-recorded
for your protection.
MAILING ADDRESS:
SAFECO Mutual Funds
Class A & B Shares
P.O. Box 419241
Kansas City, MO 64141-6241
EXPRESS/OVERNIGHT MAIL:
SAFECO Mutual Funds
Class A & B Shares
330 W. 9th Street
Kansas City, MO 64105
E-MAIL: [email protected]
GMF 4068 2/99
RECYCLE LOGO Printed on Recycled Paper.
This report must be preceded or
accompanied by a current prospectus.
- -Registered Trademark-A registered trademark of SAFECO Corporation.
