<PAGE>
December 31, 1997
ANNUAL
REPORT
TAX-EXEMPT
BOND FUNDS
NO-LOAD CLASS
----------
<TABLE>
<S> <C>
SAFECO Municipal Bond Fund . . . . . . . . . . . . . . . . 3
SAFECO California Tax-Free Income Fund . . . . . . . . . .10
SAFECO Insured Municipal Bond Fund . . . . . . . . . . . .14
SAFECO Washington State Municipal Bond Fund. . . . . . . .19
SAFECO Intermediate-Term Municipal Bond Fund . . . . . . .23
</TABLE>
<PAGE>
REPORT FROM THE FUND MANAGER
December 31, 1997
- --------------------------------------------------------------------------------
[PHOTO]
STEPHEN C. BAUER
MARKET OVERVIEW
Nineteen ninety-seven was a very good year for long-term bonds. While the
financial press was obsessed about the stock market and if the bull market would
continue, long-term interest rates quietly dropped to their lowest levels in 20
years. This produced handsome total returns for all classes of fixed-income
securities.
The Lehman Brothers Long Municipal Bond Index had a double-digit total
return, 11.31% for the year. These excellent returns are particularly gratifying
because most economists expected rates to rise during 1997 in the heat of the
Federal Reserve's battle against inflation. The expected increase in inflation
did not materialize, and the Fed's policy of "watchful waiting" proved the right
one.
(Interestingly, in light of financial problems in Asia, there are a few
prognosticators who expect the Fed to ease monetary policy and allow yields to
decline.)
The Consumer Price Index, a broad gauge of inflation, posted its lowest
annual increase of the nineties, less than 2%. This means that real returns
(returns adjusted for inflation) were almost as high as stated returns.
Already buoyed by low inflation, the bond market floated even higher on a
strong dollar and increased volatility in the stock market. The strong dollar
attracted foreign investors to our domestic bond market, bidding prices up and
pushing yields down. During the second half of the year investors came to the
bond market from the increasingly volatile stock market.
Our investment strategy for 1998 will be based on the fundamental policies
which have always governed the family of SAFECO Municipal Bond Funds--the same
strategy that has produced our long-term success. We will stay fully invested
and resist the temptation to try to time the market or predict the future. It
simply can't be done.
For our long-term funds, we will buy long-term bonds. We are in this for
the long haul, and long bonds yield more than short bonds. For those investors
who want an intermediate- or shorter-term fund, we have one. Still, even though
we populate our intermediate-term fund with mid-range bonds, we manage it with a
long view as well--we aren't out to make a quick gain; we're aiming for good
results over the years.
-2-
<PAGE>
- --------------------------------------------------------------------------------
One of our greatest advantages over our competition is our willingness and
ability to make decisions which may not look good for several years--that is to
buy and hold out-of-favor bonds. If we are correct in recognizing value, the
market will reward us for our patience.
We think that long-term performance is most important to our shareholders
and so it is most important to us.
SAFECO MUNICIPAL BOND FUND
The total return for the Municipal Bond Fund was 10.68% for the year ended
December 31, 1997, which compares favorably with 9.10%, the average return for
general municipal bond funds reported by Lipper Analytical Services. Of the 235
funds reporting one-year returns, SAFECO Municipal was number 11.
The Fund slightly underperformed the Lehman Brothers Long Municipal Bond
Index's return of 11.31%, but this is standard. It's nearly impossible for a
bond fund to beat a bond index because the index has no expenses, no cash and no
call features. The difference in the performance of the Fund and its peer group
over the long term is a better measure of success.
As nice as it is to do well for a given year, the more important results
are for the longer time periods. Fortunately, our three-, five-, and ten-year
returns, which
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------
<S> <C>
1-Year 10.68%
5-Year 7.48%
10-Year 9.02%
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT VALUE
SAFECO LEHMAN BROTHERS
MINICIPAL BOND LONG MUNICIPAL
FUND: $23,723 BOND INDEX: $25,516
-------------- -------------------
<S> <C> <C>
12/31/87 10,000 10,000
01/31/88 10,473 10,399
02/28/88 10,593 10,521
03/31/88 10,386 10,371
04/30/88 10,464 10,453
05/31/88 10,434 10,464
06/30/88 10,645 10,667
07/31/88 10,700 10,739
08/31/88 10,755 10,781
09/30/88 10,995 11,026
10/31/88 11,298 11,277
11/30/88 11,165 11,155
12/31/88 11,388 11,350
01/31/89 11,650 11,617
02/28/89 11,476 11,454
03/31/89 11,476 11,464
04/30/89 11,745 11,800
05/31/89 11,965 12,073
06/30/89 12,116 12,257
07/31/89 12,240 12,419
08/31/89 12,132 12,230
09/30/89 12,122 12,193
10/31/89 12,240 12,354
11/30/89 12,460 12,616
12/31/89 12,536 12,710
01/31/90 12,390 12,581
02/28/90 12,532 12,723
03/31/90 12,515 12,736
04/30/90 12,323 12,580
05/31/90 12,712 12,936
06/30/90 12,830 13,063
07/31/90 13,076 13,293
08/31/90 12,736 12,977
09/30/90 12,711 12,957
10/31/90 12,954 13,231
11/30/90 13,314 13,566
12/31/90 13,369 13,626
01/31/91 13,581 13,809
02/28/91 13,640 13,906
03/31/91 13,657 13,939
04/30/91 13,886 14,155
05/31/91 14,026 14,322
06/30/91 13,978 14,295
07/31/91 14,199 14,516
08/31/91 14,416 14,724
09/30/91 14,646 14,938
10/31/91 14,803 15,094
11/30/91 14,755 15,112
12/31/91 15,212 15,472
01/31/92 15,080 15,463
02/28/92 15,119 15,487
03/31/92 15,100 15,526
04/30/92 15,243 15,674
05/31/92 15,500 15,904
06/30/92 15,835 16,211
07/31/92 16,444 16,806
08/31/92 16,107 16,580
09/30/92 16,139 16,654
10/31/92 15,787 16,376
11/30/92 16,270 16,837
12/31/92 16,543 17,055
01/31/93 16,704 17,216
02/28/93 17,426 18,017
03/31/93 17,153 17,800
04/30/93 17,388 18,043
05/31/93 17,488 18,192
06/30/93 17,847 18,535
07/31/93 17,778 18,553
08/31/93 18,251 19,028
09/30/93 18,455 19,293
10/31/93 18,506 19,329
11/30/93 18,272 19,095
12/31/93 18,637 19,588
01/31/94 18,864 19,819
02/28/94 18,306 19,163
03/31/94 17,376 18,019
04/30/94 17,392 18,158
05/31/94 17,601 18,370
06/30/94 17,406 18,150
07/31/94 17,807 18,616
08/31/94 17,820 18,655
09/30/94 17,380 18,223
10/31/94 17,008 17,663
11/30/94 16,659 17,197
12/31/94 17,100 17,807
01/31/95 17,729 18,590
02/28/95 18,474 19,348
03/31/95 18,609 19,581
04/30/95 18,581 19,571
05/31/95 19,445 20,404
06/30/95 19,029 20,028
07/31/95 19,120 20,131
08/31/95 19,367 20,415
09/30/95 19,511 20,575
10/31/95 19,920 21,073
11/30/95 20,472 21,616
12/31/95 20,773 21,953
01/31/96 20,841 22,048
02/28/96 20,611 21,779
03/31/96 20,140 21,380
04/30/96 19,988 21,295
05/31/96 20,021 21,305
06/30/96 20,316 21,633
07/31/96 20,565 21,847
08/31/96 20,492 21,819
09/30/96 20,906 22,303
10/31/96 21,153 22,576
11/30/96 21,625 23,061
12/31/96 21,433 22,923
01/31/97 21,330 22,877
02/28/97 21,551 23,124
03/31/97 21,184 22,724
04/30/97 21,452 22,992
05/31/97 21,811 23,438
06/30/97 22,085 23,738
07/31/97 22,985 24,602
08/31/97 22,589 24,275
09/30/97 22,901 24,624
10/31/97 23,080 24,836
11/30/97 23,253 25,057
12/31/97 23,723 25,516
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund to
a hypothetical investment in a relevant market index. 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.
-3-
<PAGE>
- --------------------------------------------------------------------------------
have also been above average, better reflect the results of our long-term
strategy. (For the three years, SAFECO Municipal was 9 of 190 funds reporting to
Lipper. For the five and ten years, it was 15 of 111 and 11 of 72.)
In the world of municipal bonds, it is hard to implement a strategy which
has an immediate impact. Value is often not recognized for two or three years.
Hence, much of the last three year's good performance stems from transactions
done in 1994 when prices fell dramatically. The chaotic markets of that year
provided opportunities to add value to the Fund, even though much of that value
was not fully realized until years later.
The valuable call protection afforded by the deep discount bonds, which are
a hallmark of all the SAFECO Municipal bond funds, came into its own this year.
While bonds priced at par (current interest rates) rose from 4% at mid-year to
5% at year-end, deep discounts rose 6% to 8% in price over the same period.
Stephen C. Bauer
- --------------------------------------------------------------------------------
Steve Bauer joined SAFECO in 1971 as a fixed-income analyst. He became a fund
manager with the inception of the SAFECO Municipal Bond Fund in 1981, and is
President of SAFECO Asset Management Company. Bauer holds a B.S. in microbiology
and an M.B.A. from the University of Washington.
- --------------------------------------------------------------------------------
HIGHLIGHTS
- --------------------------------------------------------------------------------
CURRENT YIELD (30-DAY) . . . . . . . . . . . . . . . . . . . . . . . . . 4.72%
WEIGHTED AVERAGE MATURITY. . . . . . . . . . . . . . . . . . . . . 23.5 YEARS
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE STATES NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21%
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Texas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
<CAPTION>
Percent of
TOP FIVE HOLDINGS Net Assets
- --------------------------------------------------------------------------------
<S> <C>
San Joaquin Hills Transportation
Corridor Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7%
Wyoming Community Development. . . . . . . . . . . . . . . . . . . . . 3.8
Illinois Educational Facilities Authority. . . . . . . . . . . . . . . 3.6
Alaska Housing Finance Corp. . . . . . . . . . . . . . . . . . . . . . 3.2
Austin Combined Utility System . . . . . . . . . . . . . . . . . . . . 3.2
</TABLE>
S&P CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
[CHART]
1 AAA: 34%
2 AA: 24%
3 A: 26%
4 BBB: 12%
5 Not Rated: 2%
6 Cash and Other: 2%
-4-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C> <C>
BONDS* - 98.1%
ALABAMA - 1.8%
$2,000 Alabama Special Care Facility
Financial Authority
5.00%, due 11/01/25 . . . . . . . . . . . . . . . . .$ 1,902
1,310 Board of Trustees Alabama
Agriculture and Mechanical
University Revenue
5.50%, due 11/01/20 [MBIA]. . . . . . . . . . . . . . .1,348
1,000 Citronelle Industrial Development
Board Pollution Control Revenue
8.00%, due 12/01/12 . . . . . . . . . . . . . . . . . .1,094
4,250 Jefferson County Alabama
Sewer Revenue
8.00%, due 12/01/12 . . . . . . . . . . . . . . . . . .4,479
ALASKA - 4.3%
Alaska Housing Finance Corp.
Veterans Mortgage Program
595 6.50%, due 6/01/31. . . . . . . . . . . . . . . . . . . .613
17,000 5.00%, due 12/01/18 . . . . . . . . . . . . . . . . . 16,215
5,000 City of Valdez, Alaska Marine
Terminal Revenue Refunding
Bonds (BP Pipelines (Alaska) Inc.
Project) Series 1993B
5.50%, due 10/01/28 . . . . . . . . . . . . . . . . . .5,028
ARIZONA - 1.8%
9,800 Phoenix Civic Improvement Corp.
Wastewater System Lease
Revenue
4.75%, due 7/01/23 [MBIA] . . . . . . . . . . . . . . .9,168
CALIFORNIA - 20.5%
1,500 Foothill/Eastern Transportation
Corridor Agency Toll Road
Revenue
5.00%, due 1/01/35. . . . . . . . . . . . . . . . . . .1,409
2,500 Los Angeles County Certificates
of Participation (Disney Parking
Project)
5.50%, due 9/01/21. . . . . . . . . . . . . . . . . . .2,507
$13,000 Los Angeles Department of
Water and Power Electric Plant
Revenue
5.25%, due 11/15/26 . . . . . . . . . . . . . . . . .$12,885
Los Angeles Wastewater
System Revenue
5,000 4.70%, due 11/01/19 [FGIC]. . . . . . . . . . . . . . .4,719
2,200 Metropolitan Water District of
Southern California Waterworks
Revenue
5.75%, due 3/01/14. . . . . . . . . . . . . . . . . . .2,241
5,250 Northern California Power
Agency Geothermal Project
Revenue
5.00%, due 7/01/09. . . . . . . . . . . . . . . . . . .5,250
Pittsburg Redevelopment
Agency Los Medanos Community
Development Project Tax
Allocation
11,995 5.80%, due 8/01/34 [FSA]. . . . . . . . . . . . . . . 13,094
6,400 4.625%, due 8/01/21 [AMBAC] . . . . . . . . . . . . . .5,944
1,000 Redding Joint Powers Financing
Solid Waste and Corporation
Yard Revenue
5.00%, due 1/01/23. . . . . . . . . . . . . . . . . . . .947
8,750 Sacramento County Sanitation
District Finance Authority
4.75%, due 12/01/23 . . . . . . . . . . . . . . . . . .8,169
3,600 San Francisco Airport
Commission Sewer Revenue
6.00%, due 5/01/25 [FGIC] . . . . . . . . . . . . . . .3,876
1,700 San Francisco Redevelopment
Financing Authority
Tax Allocation Revenue
4.75%, due 8/01/18 [FGIC] . . . . . . . . . . . . . . .1,620
8,010 San Joaquin County Public
Facilities Financing Corp.
Certificates of Participation
Capital Facilities Project
4.75%, due 11/15/19 [MBIA]. . . . . . . . . . . . . . .7,602
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C> <C>
CALIFORNIA (CONTINUED)
$25,000 San Joaquin Hills Transportation
Corridor Agency Senior Lien Toll
Road Revenue
5.00%, due 1/01/33. . . . . . . . . . . . . . . . . .$23,698
Southern California Public Power
Authority Power Project Revenue
(Multiple Projects)
4,085 ++5.50%, due 7/01/20
(Prerefunded 7/01/00 @ 100) . . . . . . . . . . . . . .4,239
3,165 5.50%, due 7/01/20. . . . . . . . . . . . . . . . . . .3,176
2,200 Southern California Public Power
Authority Power Project Revenue
(Palo Verde Project)
5.00%, due 7/01/17. . . . . . . . . . . . . . . . . . .2,141
COLORADO - 0.3%
1,000 Colorado Housing Finance
Authority Multi-Family Mortgage
Revenue
8.30%, due 10/01/23 . . . . . . . . . . . . . . . . . .1,107
235 Colorado Housing Finance
Authority Single Family
Residential Housing Revenue
8.75%, due 9/01/17. . . . . . . . . . . . . . . . . . . .241
FLORIDA - 1.7%
3,000 Florida Board of Education
General Obligation
5.00%, due 6/01/24. . . . . . . . . . . . . . . . . . .2,918
2,750 Mid-Bay Bridge Authority
Revenue
6.10%, due 10/01/22 . . . . . . . . . . . . . . . . . .2,876
3,000 Orlando Utility Commission
Water and Electric Revenue
5.00%, due 10/01/23 . . . . . . . . . . . . . . . . . .2,886
GEORGIA - 3.2%
6,750 Atlanta Water and Sewerage
Revenue
4.50%, due 1/01/18. . . . . . . . . . . . . . . . . . .6,206
$ 4,000 Cobb County Kennestone
Hospital Authority Revenue
5.00%, due 4/01/24 [MBIA] . . . . . . . . . . . . . .$ 3,864
5,000 Municipal Electric Authority
Project One Special Obligation
Fourth Crossover Series
6.50%, due 1/01/20. . . . . . . . . . . . . . . . . . .5,839
ILLINOIS - 7.0%
5,500 Illinois Dedicated Tax Revenue
(Civic Center)
7.00%, due 12/15/10 [AMBAC] . . . . . . . . . . . . . .5,997
17,500 Illinois Educational Facilities
Authority Adjustable Demand
Revenue (University of Chicago)
5.70%, due 12/01/25 . . . . . . . . . . . . . . . . . 18,027
5,000 Metropolitan Pier and Exposition
Authority McCormick
Place Convention Complex
Hospitality Facilities Revenue
7.00%, due 7/01/26. . . . . . . . . . . . . . . . . . .6,132
4,770 University of Illinois Auxiliary
Facilities System Revenue
5.75%, due 4/01/22. . . . . . . . . . . . . . . . . . .4,955
INDIANA - 5.3%
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) . . . . . . . . . . . . . 12,529
7,715 Hammond Multi-School Building
Corp. First Mortgage Revenue
6.20%, due 7/10/15. . . . . . . . . . . . . . . . . . .8,239
6,450 Indianapolis Gas Utility System
Revenue
4.00%, due 6/01/11 [FGIC] . . . . . . . . . . . . . . .5,938
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-6-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C> <C>
MARYLAND - 2.0%
$5,125 Baltimore Project and Revenue
(Water Projects)
5.00%, due 7/01/24 [FGIC] . . . . . . . . . . . . . . $5,166
5,000 Maryland Health and Higher
Educational Facilities Authority
Revenue (University of Maryland
Medical System)
4.75%, due 7/01/23 [FGIC] . . . . . . . . . . . . . . .4,731
MASSACHUSETTS - 2.5%
5,140 Massachusetts Housing Finance
Agency (Rental Housing and
Mortgage Revenue)
6.20%, due 7/01/38 [AMBAC]. . . . . . . . . . . . . . .5,456
Massachusetts Water Resources
Authority General Revenue
4,500 6.00%, due 4/01/20. . . . . . . . . . . . . . . . . . .4,691
2,500 4.75%, due 12/01/23 . . . . . . . . . . . . . . . . . .2,297
MICHIGAN - 1.4%
5,250 Detroit Water Supply System
Revenue
4.75%, due 7/01/19 [FGIC] . . . . . . . . . . . . . . .4,985
2,000 University of Michigan Hospital
Revenue
6.375%, due 12/01/24. . . . . . . . . . . . . . . . . .2,086
MISSOURI - 1.0%
5,000 The Curators of the University of
Missouri System Facilities
Revenue Bonds Series 1997
5.80%, due 11/01/27 . . . . . . . . . . . . . . . . . .5,275
NEW JERSEY - 0.3%
1,465 ++New Jersey Turnpike Authority
Revenue
10.375%, due 1/01/03
(Escrowed to Maturity). . . . . . . . . . . . . . . . .1,704
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 - 6.8%
New York City Municipal Water
Finance Authority Water and
Sewer System Revenue
2,205 6.00%, due 6/15/19 [FGIC] . . . . . . . . . . . . . . .2,272
2,100 5.00%, due 6/15/17 [FGIC] . . . . . . . . . . . . . . .2,077
New York Dormitory Authority
State University Educational
Facilities Revenue
4,400 7.50%, due 5/15/11. . . . . . . . . . . . . . . . . . .5,414
5,250 7.50%, due 5/15/13. . . . . . . . . . . . . . . . . . .6,639
5,500 5.25%, due 5/15/15. . . . . . . . . . . . . . . . . . .5,645
1,500 5.00%, due 7/01/15. . . . . . . . . . . . . . . . . . .1,476
4,000 ++New York Local Government
Assistance Corp.
7.00%, due 4/01/21
(Prerefunded 4/01/01 @ 100) . . . . . . . . . . . . . .4,357
6,500 New York State Urban
Development Corporation
Correctional Facilities Revenue
Bonds Series 6
5.375%, due 1/01/25 . . . . . . . . . . . . . . . . . .6,440
NORTH CAROLINA - 2.3%
11,000 North Carolina Eastern Municipal
Power Agency Power System
Revenue
6.00%, due 1/01/22. . . . . . . . . . . . . . . . . . 11,805
OKLAHOMA - 1.3%
5,590 McGee Creek Authority Water
Revenue
6.00%, due 1/01/23 [MBIA] . . . . . . . . . . . . . . .6,374
Pennsylvania - 3.9%
5,000 Centre County University Area
Joint Authority Sewer Revenue
4.75%, due 11/01/20 [MBIA]. . . . . . . . . . . . . . .4,733
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-7-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C> <C>
PENNSYLVANIA (CONTINUED)
$ 6,000 ++Pennsylvania Intergovernmental
Cooperative Authority Special
Tax Revenue (City of Philadelphia)
6.80%, due 6/15/22
(Prerefunded 6/15/02 @ 100) . . . . . . . . . . . . . $6,632
7,415 ++Philadelphia Water and Sewer
Revenue
7.00%, due 8/01/18
(Prerefunded 8/01/01 @ 100) . . . . . . . . . . . . . .8,124
SOUTH CAROLINA - 5.5%
10,250 Charleston County Hospital
Facility Revenue
5.00%, due 10/01/22 [MBIA]. . . . . . . . . . . . . . .9,883
1,040 Charleston County Pollution
Control Facilities Revenue
5.90%, due 8/01/03. . . . . . . . . . . . . . . . . . .1,041
5,500 Pickens County and Richland
County Hospital Revenue
5.75%, due 8/01/21 [AMBAC]. . . . . . . . . . . . . . .5,648
South Carolina Public Service
Authority Power Supply Revenue
1,395 5.70%, due 7/01/08. . . . . . . . . . . . . . . . . . .1,397
10,000 5.125%, due 1/01/32 . . . . . . . . . . . . . . . . . .9,726
TEXAS - 6.9%
10,000 Austin Combined Utility System
Revenue
12.50%, due 11/15/07 [MBIA] . . . . . . . . . . . . . 16,152
Austin Water, Sewer and
Electric Revenue
4,195 14.00%, due 11/15/01. . . . . . . . . . . . . . . . . .5,070
80 14.00%, due 11/15/01. . . . . . . . . . . . . . . . . . . 97
75 14.00%, due 11/15/01. . . . . . . . . . . . . . . . . . . 81
2,000 City of Houston, Texas Water
and Sewer System Junior Lien
Revenue Bonds, Series 1997C
5.375%, due 12/01/27 [FGIC] . . . . . . . . . . . . . .2,029
$1,600 ++Coastal Industrial Water Authority
Water Revenue
5.50%, due 12/15/09 . . . . . . . . . . . . . . . . . $1,655
2,260 Texas Municipal Power Agency
Revenue
5.50%, due 9/01/13 [FGIC] . . . . . . . . . . . . . . .2,261
7,500 Waco Texas Health Facilities
Development Corp. Hospital
Revenue
5.00%, due 11/01/25 . . . . . . . . . . . . . . . . . .7,248
UTAH - 0.9%
Intermountain Power Agency
Special Obligation First
Crossover Series
1,900 6.00%, due 7/01/23. . . . . . . . . . . . . . . . . . .1,922
2,750 5.00%, due 7/01/16. . . . . . . . . . . . . . . . . . .2,653
VIRGINIA - 0.2%
1,110 ++Richmond Metropolitan
Expressway Authority Revenue
5.60%, due 1/15/13. . . . . . . . . . . . . . . . . . .1,163
WASHINGTON - 12.7%
7,000 CDP King County III Lease
Revenue Bonds, 1997 (King
Street Center Project)
5.25%, due 6/01/26 [MBIA] . . . . . . . . . . . . . . .6,969
Douglas County Public Utility
District #1 Wells Hydroelectric
Revenue
5,055 8.75%, due 9/01/18. . . . . . . . . . . . . . . . . . .6,658
2,200 8.75%, due 9/01/18. . . . . . . . . . . . . . . . . . .2,968
2,500 Everett School District #2
Snohomish County Unlimited
Tax General Obligation
6.20%, due 12/01/12 [MBIA]. . . . . . . . . . . . . . .2,743
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-8-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C> <C>
WASHINGTON (CONTINUED)
$2,200 King County Housing Authority
Pooled Housing Refunding
Revenue
6.80%, due 3/01/26. . . . . . . . . . . . . . . . . . $2,342
1,650 King County Limited Tax General
Obligation (Various Purposes)
4.75%, due 1/01/19. . . . . . . . . . . . . . . . . . .1,552
2,255 King County Public Hospital
District #1 Hospital Facilities
Revenue (Valley Medical Center)
5.50%, due 9/01/17 [AMBAC]. . . . . . . . . . . . . . .2,281
4,800 Lewis County Public Utility
District #1 Cowlitz Falls
Hydroelectric Project Revenue
6.00%, due 10/01/24 . . . . . . . . . . . . . . . . . .4,983
4,000 Port of Seattle Revenue
6.00%, due 12/01/14 . . . . . . . . . . . . . . . . . .4,126
2,944 Seattle Housing Authority
Washington Low Income Housing
Revenue Mt. Zion Project
6.60%, due 8/20/38. . . . . . . . . . . . . . . . . . .3,222
3,000 Washington Health Care Facilities
Authority Revenue (Fred
Hutchinson Cancer Research
Center) 7.375%, due 1/01/18 . . . . . . . . . . . . . .3,294
6,350 Washington Health Care Facilities
Authority Revenue (Yakima Valley
Memorial Hospital Association)
7.25%, due 1/01/21. . . . . . . . . . . . . . . . . . .7,012
8,500 Washington Public Power Supply
System Nuclear Project #1
Revenue
6.00%, due 7/01/17. . . . . . . . . . . . . . . . . . .8,882
4,000 Washington Public Power Supply
System Nuclear Project #2
Revenue
6.30%, due 7/01/12. . . . . . . . . . . . . . . . . . .4,556
2,610 Washington Public Power Supply
System Nuclear Project #3
Revenue
5.50%, due 7/01/18 [AMBAC]. . . . . . . . . . . . . . .2,615
WISCONSIN - 0.2%
$ 1,000 Wisconsin Health and Education
Facilities Authority Revenue
6.00%, due 10/01/12 [MBIA]. . . . . . . . . . . . . $ 1,020
WYOMING - 3.7%
18,375 Wyoming Community
Development Authority Housing
Revenue 5.60%, due 6/01/29
[MBIA]. . . . . . . . . . . . . . . . . . . . . . . . 18,870
--------
TOTAL BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . 494,321
--------
TEMPORARY INVESTMENTS - 0.7%
INVESTMENT COMPANIES:
3,330 Federated Tax-Exempt
Money Market Fund, Inc. . . . . . . . . . . . . . . . .3,330
--------
TOTAL TEMPORARY INVESTMENTS. . . . . . . . . . . . . . . . . . . . . .3,330
--------
TOTAL INVESTMENTS - 98.8%. . . . . . . . . . . . . . . . . . . . . .497,651
Other Assets, less Liabilities . . . . . . . . . . . . . . . . . . . .6,187
--------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . .$503,838
--------
--------
</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> <C>
MBIA: Municipal Bond Investors
Assurance Corp. . . . . . . . . . . . . . . . . . . . . 17.6%
FGIC: Financial Guaranty Insured Corp . . . . . . . . . . . . 7.9
AMBAC: AMBAC Indemnity Corp. . . . . . . . . . . . . . . . . . 5.5
FSA: Financial Security
Assurance, Inc. . . . . . . . . . . . . . . . . . . . . 2.6
--------
33.6%
--------
--------
</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
-9-
<PAGE>
REPORT FROM THE FUND MANAGER*
December 31, 1997
- --------------------------------------------------------------------------------
SAFECO CALIFORNIA
TAX-FREE INCOME FUND
The SAFECO California Tax-Free Income Fund was again the best performing
fund of the SAFECO Tax-Exempt Bond Trust for the year ended December 31, 1997.
The Fund's no-load class delivered 11.55%, while the average California
municipal bond fund returned 9.15% as measured by Lipper Analytical Services.
The Fund was sixth of 103 funds reporting one-year results and number one of 81
funds for the three years just ended. (For the five and ten years, the SAFECO
California Fund ranked third of 51 funds and first of 30, respectively reporting
for those periods.)
The Fund outperformed the Lehman Brothers Long Municipal Bond Index return
of 11.31%. This is remarkable, given the difficulty of beating a bond index.
Strong demand for California tax-exempt bonds as the local economy improved
helped the entire sector prosper.
*SEE OVERVIEW ON PAGE 2
CALIFORNIA TAX-FREE INCOME FUND
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------
<S> <C>
1-Year 11.55%
5-Year 8.21%
10-Year 9.11%
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT VALUE
SAFECO LEHMAN BROTHERS
CALIFORNIA TAX-FREE LONG MUNICIPAL
INCOME FUND: $23,910 BOND INDEX: $25,516
-------------------- -------------------
<S> <C> <C>
12/31/87 10,000 10,000
01/31/88 10,492 10,399
02/28/88 10,646 10,521
03/31/88 10,334 10,371
04/30/88 10,392 10,453
05/31/88 10,301 10,464
06/30/88 10,565 10,667
07/31/88 10,594 10,739
08/31/88 10,641 10,781
09/30/88 10,891 11,026
10/31/88 11,214 11,277
11/30/88 11,045 11,155
12/31/88 11,279 11,350
01/31/89 11,549 11,617
02/28/89 11,383 11,454
03/31/89 11,377 11,464
04/30/89 11,641 11,800
05/31/89 11,878 12,073
06/30/89 12,005 12,257
07/31/89 12,144 12,419
08/31/89 11,996 12,230
09/30/89 11,992 12,193
10/31/89 12,108 12,354
11/30/89 12,324 12,616
12/31/89 12,397 12,710
01/31/90 12,259 12,581
02/28/90 12,409 12,723
03/31/90 12,386 12,736
04/30/90 12,198 12,580
05/31/90 12,571 12,936
06/30/90 12,692 13,063
07/31/90 12,934 13,293
08/31/90 12,611 12,977
09/30/90 12,593 12,957
10/31/90 12,911 13,231
11/30/90 13,213 13,566
12/31/90 13,261 13,626
01/31/91 13,462 13,809
02/28/91 13,504 13,906
03/31/91 13,473 13,939
04/30/91 13,682 14,155
05/31/91 13,816 14,322
06/30/91 13,749 14,295
07/31/91 13,960 14,516
08/31/91 14,152 14,724
09/30/91 14,410 14,938
10/31/91 14,565 15,094
11/30/91 14,484 15,112
12/31/91 14,925 15,472
01/31/92 14,874 15,463
02/28/92 14,878 15,487
03/31/92 14,879 15,526
04/30/92 14,988 15,674
05/31/92 15,214 15,904
06/30/92 15,513 16,211
07/31/92 16,037 16,806
08/31/92 15,730 16,580
09/30/92 15,843 16,654
10/31/92 15,403 16,376
11/30/92 15,908 16,837
12/31/92 16,119 17,055
01/31/93 16,287 17,216
02/28/93 17,025 18,017
03/31/93 16,795 17,800
04/30/93 17,042 18,043
05/31/93 17,112 18,192
06/30/93 17,431 18,535
07/31/93 17,409 18,553
08/31/93 17,898 19,028
09/30/93 18,115 19,293
10/31/93 18,116 19,329
11/30/93 17,834 19,095
12/31/93 18,251 19,588
01/31/94 18,523 19,819
02/28/94 18,036 19,163
03/31/94 17,126 18,019
04/30/94 17,065 18,158
05/31/94 17,224 18,370
06/30/94 17,059 18,150
07/31/94 17,454 18,616
08/31/94 17,449 18,655
09/30/94 17,006 18,223
10/31/94 16,595 17,663
11/30/94 16,288 17,197
12/31/94 16,572 17,807
01/31/95 17,333 18,590
02/28/95 18,180 19,348
03/31/95 18,327 19,581
04/30/95 18,246 19,571
05/31/95 19,275 20,404
06/30/95 18,685 20,028
07/31/95 18,769 20,131
08/31/95 19,064 20,415
09/30/95 19,212 20,575
10/31/95 19,723 21,073
11/30/95 20,447 21,616
12/31/95 20,904 21,953
01/31/96 20,829 22,048
02/28/96 20,564 21,779
03/31/96 19,953 21,380
04/30/96 19,775 21,295
05/31/96 19,794 21,305
06/30/96 20,182 21,633
07/31/96 20,413 21,847
08/31/96 20,362 21,819
09/30/96 20,850 22,303
10/31/96 21,111 22,576
11/30/96 21,666 23,061
12/31/96 21,434 22,923
01/31/97 21,207 22,877
02/28/97 21,438 23,124
03/31/97 20,980 22,724
04/30/97 21,302 22,992
05/31/97 21,711 23,438
06/30/97 22,039 23,738
07/31/97 23,192 24,602
08/31/97 22,681 24,275
09/30/97 22,996 24,624
10/31/97 23,194 24,836
11/30/97 23,422 25,057
12/31/97 23,910 25,516
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund
to a hypothetical investment in a relevant market index. The index is
unmanaged and includes no operating expenses or transaction costs. Past
performance is not predicitive of future results. Principal value may
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
-10-
<PAGE>
REPORT FROM THE FUND MANAGER
- --------------------------------------------------------------------------------
And, our policy of staying fully invested in long-maturity, well call-protected
bonds helped our Fund surpass its peer funds and the index. Deep discount bonds,
the type we favor, did particularly well in California as they were in great
demand by other large bond funds seeking to use them to restructure their
portfolios more aggressively.
Stephen C. Bauer
- --------------------------------------------------------------------------------
Steve Bauer joined SAFECO in 1971 as a fixed-income analyst. He became a fund
manager with the inception of the SAFECO Municipal Bond Fund in 1981, and is
President of SAFECO Asset Management Company. Bauer holds a B.S. in microbiology
and an M.B.A. from the University of Washington.
- --------------------------------------------------------------------------------
HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CURRENT YIELD (30-DAY) . . . . . . . . . . . . . . . . . . . . . . . .4.51%
WEIGHTED AVERAGE MATURITY. . . . . . . . . . . . . . . . . . . . 24.5 YEARS
<CAPTION>
TOP FIVE PERCENT OF
TYPES OF BONDS NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Local General Obligation - Limited Tax . . . . . . . . . . . . . . . . .16%
Lease Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Utilities - Combination. . . . . . . . . . . . . . . . . . . . . . . . .10
Toll Road. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Hospital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
San Joaquin Hills Transportation Corridor
Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3%
Los Angeles County Sanitation
District Financing Authority . . . . . . . . . . . . . . . . . . . . 5.0
Pittsburg Redevelopment Agency . . . . . . . . . . . . . . . . . . . . 4.6
San Gabriel Valley School Finance Authority
Revenue Unified School District. . . . . . . . . . . . . . . . . . . 4.5
Foothill/Eastern Transportation
Corridor Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4
</TABLE>
S&P CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
- --------------------------------------------------------------------------------
[CHART]
1. AAA: 49%
2. AA: 9%
3. A: 22%
4. BBB: 15%
5. Not Rated: 4%
6. Cash and Other: 1%
-11-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO CALIFORNIA TAX-FREE
INCOME FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C> <C>
BONDS* - 97.4%
$2,250 California Health Facilities
Financing Authority Insured
Health Facility Refunding
Revenue Bonds
(Catholic Health Care West)
4.75%, due 7/01/19 [MBIA] . . . . . . . . . . . . . . . $2,134
3,715 California Statewide Communities
Development Authority
Certificates of Participation
(Children's Hospital of
Los Angeles)
4.75%, due 6/01/21 [MBIA] . . . . . . . . . . . . . . . .3,504
2,750 California Statewide Communities
Development Authority
Certificates of Participation
(The Trustees of The J. Paul
Getty Trust)
5.00%, due 10/01/23 . . . . . . . . . . . . . . . . . . .2,676
20 Concord Redevelopment Agency
Tax Allocation Central Concord
Redevelopment Project
8.00%, due 7/01/18 [BIG]. . . . . . . . . . . . . . . . . . 21
3,750 Culver City Redevelopment
Financing Authority
Tax Allocation Revenue
4.60%, due 11/01/20 [AMBAC] . . . . . . . . . . . . . . .3,475
4,195 Foothill/Eastern Transportation
Corridor Agency
Toll Road Revenue
5.00%, due 1/01/35. . . . . . . . . . . . . . . . . . . .3,940
670 Inglewood Insured Hospital
Revenue (Daniel Freeman
Hospital)
6.75%, due 5/01/13. . . . . . . . . . . . . . . . . . . . .721
Los Angeles Convention and
Exhibition Center Authority
Certificates of Participation
$1,200 - 9.00%, due 12/01/20
(Prerefunded 12/01/05 @ 100) . . . . . . . . . . . . . $1,580
3,300 5.125%, due 8/15/21 [MBIA]. . . . . . . . . . . . . . . .3,249
4,500 Los Angeles County Sanitation
District Financing Authority
Revenue (Capital Projects)
5.25%, due 10/01/19 . . . . . . . . . . . . . . . . . . .4,488
3,800 Los Angeles Department of
Water and Power
Waterworks Revenue
4.75%, due 11/15/19 [FGIC]. . . . . . . . . . . . . . . .3,611
2,000 Los Angeles Wastewater
System Revenue
4.70%, due 11/01/17 [FGIC]. . . . . . . . . . . . . . . .1,898
3,585 Metropolitan Transportation
Authority Transit Facilities Service
Contract Revenue
5.00%, due 07/01/37 . . . . . . . . . . . . . . . . . . .3,471
2,500 Northern California Power Agency
Geothermal Project Review
5.00%, due 07/01/09 . . . . . . . . . . . . . . . . . . .2,500
2,350 Palomar Pomerado Health
System California Insured
Revenue Service
4.75%, due 11/01/23 [MBIA]. . . . . . . . . . . . . . . .2,200
4,435 Pittsburg Redevelopment Agency
Los Medanos Community
Development Project
Tax Allocation
4.625%, due 8/01/21 [AMBAC] . . . . . . . . . . . . . . .4,119
Pleasanton Joint Powers
Financing Authority
Reassessment Revenue
1,640 6.20%, due 9/02/17. . . . . . . . . . . . . . . . . . . .1,721
1,855 6.15%, due 9/02/12. . . . . . . . . . . . . . . . . . . .1,984
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-12-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO CALIFORNIA TAX-FREE
INCOME FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C> <C>
$3,900 Redding Joint Powers Financing
Authority Solid Waste and
Corporation Yard Revenue
5.00%, due 1/01/23. . . . . . . . . . . . . . . . . . . .$3,692
2,000 Riverside County Certificates of
Participation (Capital Projects)
6.125%, due 11/01/21. . . . . . . . . . . . . . . . . . . 2,179
3,000 Sacramento Municipal Utility
District Electric Revenue
4.75%, due 9/01/21 [MBIA] . . . . . . . . . . . . . . . . 2,837
2,500 San Bernardino County
Certificates of Participation
5.50%, due 8/01/24. . . . . . . . . . . . . . . . . . . . 2,512
1,750 San Diego Public Facilities
Financing Authority
Sewer Revenue
5.25%, due 5/15/20. . . . . . . . . . . . . . . . . . . . 1,732
4,000 San Gabriel Valley School
Finance Authority Revenue
Pamona Unified School District
5.50%, due 2/01/24. . . . . . . . . . . . . . . . . . . . 4,032
5,000 San Joaquin Hills Transportation
Corridor Agency Senior Lien
Toll Road Revenue
5.00%, due 1/01/33. . . . . . . . . . . . . . . . . . . . 4,741
4,000 San Jose Redevelopment Agency
4.75%, due 8/01/22. . . . . . . . . . . . . . . . . . . . 3,684
Southern California Public Power
Authority Power Project Revenue
(Multiple Projects)
2,665 - 5.50%, due 7/01/20
(Prerefunded 7/01/00 @ 100). . . . . . . . . . . . . . . 2,766
1,335 5.50%, due 7/01/20. . . . . . . . . . . . . . . . . . . . 1,340
1,000 Southern California Public Power
Authority Power Project Revenue
(Transportation Project)
4.75%, due 7/01/23 [MBIA] . . . . . . . . . . . . . . . . . 944
940 Stanislaus Waste-to-Energy
Financing Agency Solid Waste
Facility Revenue
7.625%, due 1/01/10 . . . . . . . . . . . . . . . . . . . 1,007
State of California General
Obligation Bonds
$2,500 5.625%, due 09/01/24. . . . . . . . . . . . . . . . . . $82,594
1,075 5.625%, due 10/01/23 [FGIC] . . . . . . . . . . . . . . . 1,121
2,595 The City of Palm Desert California
Financing Authority Tax Allocation
Refunding Revenue Bonds
(Project Area Number 1)
5.625%, due 04/01/23 [MBIA] . . . . . . . . . . . . . . . 2,710
1,940 University of California
5.00%, due 9/01/23 [AMBAC]. . . . . . . . . . . . . . . . 1,883
--------
TOTAL BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87,066
--------
TEMPORARY INVESTMENTS - 1.1%
INVESTMENT COMPANIES:
963 SEI Tax Exempt Trust
Institutional Tax Free Portfolio. . . . . . . . . . . . . . 963
--------
TOTAL TEMPORARY INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . 963
--------
TOTAL INVESTMENTS - 98.5%. . . . . . . . . . . . . . . . . . . . . . . .88,029
Other Assets, less Liabilities . . . . . . . . . . . . . . . . . . . . . 1,311
--------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $89,340
--------
--------
</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> <C>
MBIA: Municipal Bond Investors
Assurance Corp.. . . . . . . . . . . . . . . . . 19.7%
AMBAC: AMBAC Indemnity Corp . . . . . . . . . . . . . . 10.9
FGIC: Financial Guaranty Insured Corp. . . . . . . . . 7.4
-------
38.0%
--------
--------
</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.
NOTES TO FINANCIAL STATEMENTS
-13-
<PAGE>
REPORT FROM THE FUND MANAGER*
December 31, 1997
- --------------------------------------------------------------------------------
SAFECO INSURED MUNICIPAL
BOND FUND
With a 10.70% total return, the SAFECO Insured Municipal Bond Fund no-load
class finished 1997 ahead of the Lehman Brothers Long Insured Municipal Bond
Index and its peer funds. The index posted a return of 11.11% and the average
insured muni fund returned 8.39%, according to Lipper Analytical Services.
SAFECO Insured Municipal Bond Fund ranked number one among the 50 insured
muni bond funds reporting one-year returns. Returning an average of 12.19% over
the three years just ended, the SAFECO Fund was also first of 40 funds for that
time period.
Again, our policy of staying fully invested in long-maturity, call-protected
bonds helped our Fund beat the index and its peer funds.
As yields have declined to their lowest levels in 20 years, the desire to buy
higher-yielding bonds has caused the spread (difference in price)
*See overview on page 2
PERFORMANCE OVERVIEW - NO-LOAD CLASS
[GRAPH]
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1-Year 10.70 %
Since Inception 6.71% *
<TABLE>
<CAPTION>
INVESTMENT VALUE
LEHMAN BROTHERS
SAFECO INSURED LONG INSURED
MUNICIPAL BOND MUNICIPAL BOND
FUND: $13,614 INDEX: $14,226
----------------- --------------------
<S> <C> <C>
03/31/93 10,000 10,000
04/30/93 10,039 10,146
05/31/93 10,080 10,239
06/30/93 10,311 10,430
07/31/93 10,217 10,438
08/31/93 10,556 10,710
09/30/93 10,716 10,849
10/31/93 10,720 10,861
11/30/93 10,482 10,719
12/31/93 10,764 10,992
01/31/94 10,908 11,117
02/28/94 10,453 10,726
03/31/94 9,780 10,061
04/30/94 9,826 10,152
05/31/94 9,946 10,275
06/30/94 9,781 10,152
07/31/94 10,133 10,430
08/31/94 10,086 10,433
09/30/94 9,769 10,183
10/31/94 9,482 9,872
11/30/94 9,287 9,647
12/31/94 9,642 9,983
01/31/95 10,042 10,430
02/28/95 10,564 10,851
03/31/95 10,619 10,977
04/30/95 10,543 10,973
05/31/95 11,163 11,440
06/30/95 10,845 11,220
07/31/95 10,878 11,268
08/31/95 11,039 11,424
09/30/95 11,115 11,507
10/31/95 11,420 11,800
11/30/95 11,800 12,109
12/31/95 11,992 12,302
01/31/96 11,994 12,366
02/28/96 11,850 12,194
03/31/96 11,569 11,950
04/30/96 11,470 11,891
05/31/96 11,481 11,894
06/30/96 11,645 12,078
07/31/96 11,795 12,200
08/31/96 11,750 12,182
09/30/96 12,046 12,461
10/31/96 12,138 12,610
11/30/96 12,456 12,894
12/31/96 12,299 12,804
01/31/97 12,152 12,759
02/28/97 12,280 12,893
03/31/97 12,051 12,649
04/30/97 12,262 12,800
05/31/97 12,484 13,056
06/30/97 12,663 13,211
07/31/97 13,227 13,716
08/31/97 12,967 13,502
09/30/97 13,136 13,695
10/31/97 13,242 13,787
11/30/97 13,336 13,875
12/31/97 13,614 14,226
</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 the Fund to
a hypothetical investment in a relevant market index. 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>
REPORT FROM THE FUND MANAGER
- --------------------------------------------------------------------------------
between insured bonds and lower-rated bonds to narrow to unprecedented levels.
Because of this, the yield on insured bonds is virtually the same as on
uninsured bonds and provides the opportunity to own the highest quality
available without sacrificing yield.
Stephen C. Bauer
Steve Bauer joined SAFECO in 1971 as a fixed-income analyst. He became a fund
manager with the inception of the SAFECO Insured 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>
<S> <C>
CURRENT YIELD (30-DAY) . . . . . . . . . . . . . . . . . . . 4.31%
WEIGHTED AVERAGE MATURITY. . . . . . . . . . . . . . . . 22.0 YEARS
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Jefferson County Sewer . . . . . . . . . . . . . . . . . 4.8%
Cook County General Obligation . . . . . . . . . . . . . 4.4
CDP King County III Lease Revenue 97 . . . . . . . . . . 4.2
Los Angeles Convention and
Exhibition Center. . . . . . . . . . . . . . . . . . . 4.0
Massachusetts Housing Finance Agency
(Rental Housing and Mortgage
Revenue) . . . . . . . . . . . . . . . . . . . . . . . 3.9
</TABLE>
S&P CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
- --------------------------------------------------------------------------------
[CHART]
1 AAA: 90%
2 Cash and Other: 10%
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE STATES NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
California . . . . . . . . . . . . . . . . . . . . . . . 21%
Washington . . . . . . . . . . . . . . . . . . . . . . . 15
Illinois . . . . . . . . . . . . . . . . . . . . . . . . 9
Alabama. . . . . . . . . . . . . . . . . . . . . . . . . 9
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
-15-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INSURED MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
BONDS* - 90.1%
ALABAMA - 8.5%
$600 Board of Trustee Alabama
Agriculture & Mechanical
University Revenue
5.50%, due 11/01/20 [MBIA]. . . . . . . . . $617
750 Jefferson County Sewer Revenue
Warrants Series 1997 D
5.70%, due 2/01/20 [FGIC] . . . . . . . . . 790
CALIFORNIA - 20.5%
385 Fresno Sewer System Revenue
4.50%, due 9/01/23 [AMBAC]. . . . . . . . . 350
665 Los Angeles Convention and
Exhibition Center Authority
Certificates of Participation
5.125%, due 8/15/21 [MBIA]. . . . . . . . . 655
600 Los Angeles County Sanitation
District Financing Authority
Revenue (Capital Projects)
5.25%, due 10/01/19 [MBIA]. . . . . . . . . 600
500 Los Angeles Department of Water
and Power Electricity Refunding
Revenue
4.25%, due 11/15/14 [MBIA]. . . . . . . . . 454
650 Los Angeles Wastewater System
Revenue
4.70%, due 11/01/19 [FGIC]. . . . . . . . . 614
350 Sacramento Municipal Utility
District Electric Revenue
4.75%, due 9/01/21 [MBIA] . . . . . . . . . 331
250 San Diego Public Facilities
Financing Authority
Sewer Revenue
5.00%, due 5/15/23 [AMBAC]. . . . . . . . . 243
145 University of California Revenue
(Multiple Purpose Projects)
4.75%, due 9/01/15 [AMBAC]. . . . . . . . . 140
ILLINOIS - 9.1%
Chicago General Obligation
$100 5.875%, due 1/01/22 [AMBAC] . . . . . . . . $105
500 5.125%, due 1/01/25 [FGIC]. . . . . . . . . 492
750 Cook County General Obligation
5.00%, due 11/15/23 [MBIA]. . . . . . . . . 719
200 Illinois Health Facilities Authority
Revenue (The Children's
Memorial Hospital)
5.00%, due 8/15/22 [MBIA] . . . . . . . . . 190
INDIANA - 4.3%
100 Indiana Municipal Power Agency
Power Supply System Revenue
6.125%, due 1/01/13 [MBIA]. . . . . . . . . 114
250 Indiana State Office Building
Commission Capitol Complex
Revenue
5.25%, due 7/01/15 [AMBAC]. . . . . . . . . 251
350 Indianapolis Gas Utility Revenue
5.375%, due 6/01/21 [FGIC]. . . . . . . . . 351
IOWA - 1.6%
250 Marshalltown Pollution Control
Revenue (Iowa Electric Light
and Power Co. Project)
5.50%, due 11/01/23 [MBIA]. . . . . . . . . 256
MASSACHUSETTS - 3.9%
600 Massachusetts Housing Finance
Agency (Rental Housing and
Mortgage Revenue)
6.20%, due 7/01/38 [AMBAC]. . . . . . . . . 637
MICHIGAN - 5.9%
350 Detroit Water Supply System
Revenue
5.00%, due 7/01/23 [FGIC] . . . . . . . . . 338
600 Huron Valley School District
General Obligation
5.75%, due 5/01/22 [FGIC] . . . . . . . . . 630
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-16-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INSURED MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
MINNESOTA - 2.0%
$350 Minneapolis and St. Paul Housing
and Redevelopment Authority
Health Care System Revenue
(HealthSpan)
4.75%, due 11/15/18 [AMBAC] . . . . . . . . $332
NORTH CAROLINA - 0.8%
125 North Carolina Eastern Municipal
Power Agency Power System
Revenue
5.50%, due 1/01/17 [FGIC] . . . . . . . . . 127
PENNSYLVANIA - 8.4%
350 Montgomery County Higher
Education and Health Authority
Hospital Revenue (Abington
Memorial Hospital)
5.125%, due 6/01/24 [AMBAC] . . . . . . . . 344
650 Pittsburgh Water and Sewer
Authority Revenue
4.75%, due 9/01/16 [FGIC] . . . . . . . . . 625
445 University Area Joint Authority
Sewer Revenue
4.75%, due 11/01/20 [MBIA]. . . . . . . . . 421
RHODE ISLAND - 3.0%
500 Rhode Island Health and
Education Building Corporation
Higher Education Facility Revenue
5.25%, due 9/15/23 [MBIA] . . . . . . . . . 496
TEXAS - 5.3%
200 Colorado River Municipal Water
District Water System Revenue
5.15%, due 1/01/21 [AMBAC]. . . . . . . . . 197
250 Harris County Toll Road Unlimited
Tax Revenue
5.50%, due 8/15/21 [FGIC] . . . . . . . . . 256
TEXAS (CONTINUED)
Lower Colorado River Authority
Junior Lien Revenue
$300 5.625%, due 1/01/17 [FSA] . . . . . . . . . $309
10 / / 5.625%, due 1/01/17 [FSA]
(Prerefunded 1/01/15 @ 100). . . . . . . . 11
95 Sabine River Authority Pollution
Control Revenue (Texas Utilities
Electric Co. Project)
6.55%, due 10/01/22 [FGIC]. . . . . . . . . 104
VIRGINIA - 1.5%
250 Virginia Housing Development
Authority Commonwealth
Mortgage
5.25%, due 7/01/27 [AMBAC]. . . . . . . . . 250
WASHINGTON - 15.3%
700 CDP King County III Lease
Revenue 97
5.25%, due 6/01/26 [MBIA] . . . . . . . . . 697
100 King County Public Hospital
District #1 Hospital Facilities
Revenue (Valley Medical Center)
5.50%, due 9/01/17 [AMBAC]. . . . . . . . . 101
500 Municipality of Metropolitan
Seattle Sewer Revenue
6.30%, due 1/01/33 [MBIA] . . . . . . . . . 546
250 Richland Water and Sewer
Improvement Revenue
5.625%, due 4/01/12 [MBIA]. . . . . . . . . 261
530 Snohomish County Public Utility
District #1 Electric Revenue
5.50%, due 1/01/20 [FGIC] . . . . . . . . . 537
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-17-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INSURED MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
WASHINGTON (CONTINUED)
$100 Washington Health Care Facilities
Authority Revenue (Swedish
Hospital Medical Center)
6.30%, due 11/15/22 [AMBAC] . . . . . . . . $109
250 Yakima-Tieton Irrigation District
Revenue
6.20%, due 6/01/19 [FSA]. . . . . . . . . . 273
------
TOTAL BONDS . . . . . . . . . . . . . . . . . . . . . . 14,873
------
TEMPORARY INVESTMENTS - 8.7%
INVESTMENT COMPANIES:
$826 Federated Tax-Exempt
Money Market Fund, Inc. . . . . . . . . . . $826
619 SEI Tax-Free. . . . . . . . . . . . . . . . 619
------
TOTAL OTHER INVESTMENTS. . . . . . . . . . . . . . . . . 1,445
------
TOTAL INVESTMENTS - 98.8%. . . . . . . . . . . . . . . . 16,318
Other Assets, less liabilities . . . . . . . . . . . . . 198
------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . $16,516
------
------
</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>
MBIA: Municipal Bond Investors
Assurance Corp. . . . . . . . . . . . . . . 38.9%
FGIC: Financial Guaranty Insured Corp.. . . . . . 29.8
AMBAC: AMBAC Indemnity Corp. . . . . . . . . . . . 18.7
FSA: Financial Security
Assurance, Inc. . . . . . . . . . . . . . . 3.6
------
91.0%
------
------
</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.
NOTES TO FINANCIAL STATEMENTS
-18-
<PAGE>
REPORT FROM THE FUND MANAGER
December 31, 1997
- --------------------------------------------------------------------------------
[PHOTO]
Beverly Denny
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
For the year ended 1997, the SAFECO Washington State Municipal Bond Fund
returned 8.94%, which was above the 8.68% average for single state municipal
debt funds according to Lipper Analytical Services. The Lehman Brothers Long
Municipal Bond Index returned 11.31%.
My investment strategy is to buy and hold low-coupon, long-term bonds with
maturities of 20 years or more. Finding Washington bonds with this structure can
be difficult since many Washington state issuers structure their bonds with
shorter maturities and with coupons at current interest rates.
Therefore, to stay fully invested, I sometimes buy bonds with different
structures if I believe them to be a good value. An example would be the Seattle
Housing Authority Low Income Housing Bonds (6.6% coupon), maturing in 2038. The
high coupon (6.6%) is not a typical purchase, but the long maturity made it more
acceptable.
PERFORMANCE OVERVIEW - NO-LOAD CLASS
[GRAPH]
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1 Year 8.94%
Since inception* 11.31%
Investment Value
<TABLE>
<CAPTION>
SAFECO LEHMAN BROTHERS
WASHINGTON STATE LONG MUNICIPAL
MUNICIPAL BOND BOND INDEX:
FUND: $13,263 $14,335
---------------- ---------------
<S> <C> <C>
03/31/93 10,000 10,000
04/30/93 10,065 10,137
05/31/93 10,107 10,221
06/30/93 10,351 10,413
07/31/93 10,319 10,423
08/31/93 10,600 10,690
09/30/93 10,723 10,839
10/31/93 10,742 10,859
11/30/93 10,573 10,728
12/31/93 10,788 11,005
01/31/94 10,956 11,135
02/28/94 10,581 10,766
03/31/94 9,988 10,123
04/30/94 10,035 10,201
05/31/94 10,177 10,321
06/30/94 10,003 10,197
07/31/94 10,255 10,459
08/31/94 10,219 10,481
09/30/94 9,971 10,238
10/31/94 9,705 9,923
11/30/94 9,478 9,661
12/31/94 9,855 10,004
01/31/95 10,258 10,444
02/28/95 10,645 10,870
03/31/95 10,701 11,000
04/30/95 10,669 10,995
05/31/95 11,100 11,463
06/30/95 10,899 11,252
07/31/95 10,965 11,310
08/31/95 11,107 11,469
09/30/95 11,185 11,559
10/31/95 11,428 11,839
11/30/95 11,692 12,144
12/31/95 11,816 12,333
01/31/96 11,864 12,386
02/28/96 11,754 12,235
03/31/96 11,528 12,011
04/30/96 11,465 11,963
05/31/96 11,488 11,969
06/30/96 11,621 12,154
07/31/96 11,739 12,274
08/31/96 11,705 12,258
09/30/96 11,934 12,530
10/31/96 12,038 12,683
11/30/96 12,244 12,956
12/31/96 12,174 12,878
01/31/97 12,105 12,852
02/28/97 12,223 12,991
03/31/97 12,014 12,766
04/30/97 12,168 12,917
05/31/97 12,367 13,168
06/30/97 12,501 13,336
07/31/97 12,917 13,822
08/31/97 12,760 13,638
09/30/97 12,920 13,834
10/31/97 12,993 13,953
11/30/97 13,076 14,077
10/31/97 13,263 14,335
</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 the Fund to
a hypothetical investment in a relevant market index. 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.
-19-
<PAGE>
REPORT FROM THE FUND MANAGER
- --------------------------------------------------------------------------------
Falling interest rates during the last half of the year caused many of the
Fund's higher coupon holdings to be priced to their call dates instead of
maturity date, effectively shortening the maturity of the portfolio. To help
offset this, I bought the longest maturity (2022) issued by Washington Higher
Education for Gonzaga University. I believe these bonds represent value in the
market, given the rarity of the discount coupon, at 4.75%, and the long
maturity.
I will continue to seek to buy bonds at a "good price." By this I mean a
price that is lower than where it normally trades relative to how other
municipal bonds are trading.
Beverly R. Denny
- --------------------------------------------------------------------------------
Beverly Denny came to SAFECO 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>
<S> <C>
CURRENT YIELD (30-DAY) . . . . . . . . . . . . . . . . . . . . . 4.41%
WEIGHTED AVERAGE MATURITY. . . . . . . . . . . . . . . . . . . . 22.0 YEARS
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
City of Renton Limited Tax
General Obligation Series B. . . . . . . . . . . . . . . . . . 4.7%
Snohomish County Public
Utility District #1. . . . . . . . . . . . . . . . . . . . . . 4.5
Grant County Public Utility District #2. . . . . . . . . . . . . 4.3
Snohomish County Unlimited Tax
Obligation Everett School District #2. . . . . . . . . . . . . 4.2
Washington State Higher Education
Facilities Authority . . . . . . . . . . . . . . . . . . . . . 4.2
<CAPTION>
PERCENT OF
TOP FIVE TYPE OF BONDS NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Hospital . . . . . . . . . . . . . . . . . . . . . . . . . . . 14%
Local General Obligaton - Limited Tax. . . . . . . . . . . . . . 13
Housing - Uninsured. . . . . . . . . . . . . . . . . . . . . . . 11
Utilities - Water. . . . . . . . . . . . . . . . . . . . . . . . 9
Local General Obligatoin - Unlimited Tax . . . . . . . . . . . . 8
</TABLE>
S&P CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
- --------------------------------------------------------------------------------
[CHART]
1 AAA: 58%
2 AA: 14%
3 A: 20%
4 Not Rated: 9%
5 Cash & Other: -1%
-20-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO WASHINGTON STATE
MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
BONDS* - 101.6%
$350 City of Renton, Washington
Limited Tax General Obligation
Bonds, 1997B
5.75%, due 12/01/17 [MBIA] . . . . . . . . . . . . . . $371
100 City of Tacoma, Washington Solid
Waste Utilities Revenue Refunding
Bonds, 1997B
5.50%, due 12/01/19 [AMBAC]. . . . . . . . . . . . . . 103
315 Grant County Public Utility
District #2 Wanapum
Hydroelectric Revenue
6.375%, due 1/01/23. . . . . . . . . . . . . . . . . . 336
100 Kent Limited Tax General
Obligation
5.75%, due 12/01/26 [MBIA] . . . . . . . . . . . . . . 106
300 King County Housing Authority
Pooled Housing Refunding
Revenue
6.80%, due 3/01/26 . . . . . . . . . . . . . . . . . . 319
250 King County Limited Tax General
Obligation (Various Purposes)
4.75%, due 1/01/19 . . . . . . . . . . . . . . . . . . 235
200 King County Public Hospital
District #1 Hospital Facilities
Revenue (Valley Medical Center)
5.50%, due 9/01/17 [AMBAC] . . . . . . . . . . . . . . 202
200 King County Public Hospital
District #1 Hospital Facilities
Revenue (Valley Medical Center)
5.25%, due 9/01/15 [AMBAC] . . . . . . . . . . . . . . 201
100 King County School District #415
(Kent) Unlimited Tax General
Obligation
6.45%, due 12/01/12. . . . . . . . . . . . . . . . . . 111
200 Kitsap County School District #401
(Central Kitsap) Unlimited Tax
General Obligation
5.50%, due 12/01/11. . . . . . . . . . . . . . . . . . 209
$100 Kitsap County, Sewer Revenue
5.75%, due 7/01/16 [MBIA]. . . . . . . . . . . . . . . $106
250 Klickitat County Public Utility
District # 1 Electric Revenue
5.75%, due 10/01/27 [FGIC] . . . . . . . . . . . . . . 262
100 Lewis County Public Utility
District #1 Cowlitz Falls
Hydroelectric Project Revenue
6.00%, due 10/01/24. . . . . . . . . . . . . . . . . . 104
100 Port of Seattle Revenue
6.00%, due 12/01/14. . . . . . . . . . . . . . . . . . 103
300 Renton Water and Sewer
Improvement Revenue
5.375%, due 4/01/13 [MBIA] . . . . . . . . . . . . . . 305
175 Seattle Drainage and Wastewater
Utility Improvement Revenue
5.25%, due 12/01/25 [MBIA] . . . . . . . . . . . . . . 175
250 Seattle Housing Authority
Low Income Housing Revenue
(Mt. Zion Project)
6.60%, due 8/20/38 . . . . . . . . . . . . . . . . . . 274
200 Seattle Metro Municipality
Limited General Obligation
5.65%, due 1/01/20 . . . . . . . . . . . . . . . . . . 206
200 Seattle Metro Sewer Revenue
6.30%, due 1/01/33 [MBIA]. . . . . . . . . . . . . . . 218
200 Seattle Water System Revenue
5.25%, due 12/01/23. . . . . . . . . . . . . . . . . . 199
350 Snohomish County Public Utility
District #1 Generation System
Revenue
5.50%, due 1/01/20 [FGIC]. . . . . . . . . . . . . . . 355
300 Snohomish County Unlimited Tax
General Obligation
Everett School District #2
6.20%, due 12/01/12 [MBIA] . . . . . . . . . . . . . . 329
250 Spokane Regional Solid Waste
Management System Revenue
6.25%, due 12/01/11 [AMBAC]. . . . . . . . . . . . . . 272
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-21-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C>
$200 State of Washington Various
Purposes General Obligation
Bonds, Series 1997C
5.25%, due 1/01/19 . . . . . . . . . . . . . . . . . . $201
250 Tacoma Water System Revenue
5.50%, due 12/01/13. . . . . . . . . . . . . . . . . . 258
200 Tukwila Limited Tax General
Obligation
5.90%, due 1/01/14 . . . . . . . . . . . . . . . . . . 213
100 Washington Certificates of
Participation
(State Office Building Project)
6.00%, due 4/01/12 . . . . . . . . . . . . . . . . . . 105
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] . . . . . . . . . . . . . . 208
150 Washington Health Care Facilities
Authority Revenue (Grays Harbor
Medical Center)
5.90%, due 7/01/23 . . . . . . . . . . . . . . . . . . 157
200 Washington Health Care Facilities
Authority Revenue
(Northwest Hospital, Seattle)
5.75%, due 11/15/23 [AMBAC]. . . . . . . . . . . . . . 207
100 Washington Health Care Facilities
Authority Revenue (Swedish
Hospital Medical Center)
6.30%, due 11/15/22 [AMBAC]. . . . . . . . . . . . . . 109
350 Washington Higher Education
Facilities Authority Revenue and
Refunding Revenue (Gonzaga
University Project)
4.75%, due 4/01/22 . . . . . . . . . . . . . . . . . . 329
250 Washington Higher Education
Facilities Authority Revenue and
Refunding Revenue (Pacific
Lutheran University Project)
5.70%, due 11/01/26. . . . . . . . . . . . . . . . . . 261
$120 Washington Public Power Supply
System Nuclear Project #3
Revenue
5.50%, due 7/01/18 [AMBAC] . . . . . . . . . . . . . . $120
250 Washington State Housing
Finance Commission Revenue
(Horizon House Project)
6.125%, due 7/01/27 [MBIA] . . . . . . . . . . . . . . 262
250 Whatcom County Limited Tax
General Obligation
5.75%, due 12/01/12. . . . . . . . . . . . . . . . . . 261
200 Yakima-Tieton Irrigation District
Revenue
6.20%, due 6/01/19 [FSA] . . . . . . . . . . . . . . . 218
--------
TOTAL BONDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,010
--------
TEMPORARY INVESTMENTS - 1.6%
INVESTMENT COMPANIES:
127 Federated Tax-Exempt
Money Market Fund, Inc.. . . . . . . . . . . . . . . . 127
--------
TOTAL TEMPORARY INVESTMENTS. . . . . . . . . . . . . . . . . . . 127
--------
TOTAL INVESTMENTS - 103.2% . . . . . . . . . . . . . . . . . . . 8,137
Liabilities, less Other Assets . . . . . . . . . . . . . . . . . (250)
--------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,887
--------
--------
</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 period end are as follows:
<TABLE>
<S> <C>
MBIA: Municipal Bond Investors
Assurance Corp. . . . . . . . . . . . . . . . . . . . . 26.4%
AMBAC: AMBAC Indemnity Corp. . . . . . . . . . . . . . . . . . 15.4
FGIC: Financial Guaranty
Insurance Corp. . . . . . . . . . . . . . . . . . . . . 7.8
FSA: Financial Security
Assurance, Inc. . . . . . . . . . . . . . . . . . . . . 2.8
-------
52.4%
-------
-------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-22-
<PAGE>
REPORT FROM THE FUND MANAGER
December 31, 1997
- --------------------------------------------------------------------------------
[PHOTO]
Mary V. Metastasio
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
For the year ended December 31, 1997, the SAFECO Intermediate-Term Municipal
Bond Fund returned 7.50% while the average intermediate-term municipal bond fund
returned 7.16%, according to Lipper Analytical Services. The Fund was 49 of the
140 funds reporting one-year numbers and 18 of 112 funds reporting three-year
returns. The Lehman Brothers 7-Year Municipal Bond Index posted 7.67% for one
year.
Nineteen ninety-seven was a good year for the bond market.
The intermediate market was no exception, although the gains seen in longer
maturity bonds outpaced those for intermediates. This resulted in a flattening
of the yield curve as long interest rates fell more than intermediate ones, and
helped our longer-than-average maturity fund beat its benchmark index and peer
funds. Early in the year, I took advantage of attractive levels and the steeper
curve, and sold off some of our shorter,
PERFORMANCE OVERVIEW - NO-LOAD CLASS
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------
<S> <C>
1-Year 7.50%
Since Inception* 5.68%
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT VALUE
SAFECO LEHMAN BROTHERS
INTERMEDIATE-TERM LONG MUNICIPAL
MUNICIPAL BOND FUND BOND INDEX
$13,000 $13,353
------------------- ---------------
<S> <C> <C>
03/31/93 10,000 10,000
04/30/93 10,044 10,062
05/31/93 10,062 10,092
06/30/93 10,222 10,277
07/31/93 10,204 10,278
08/31/93 10,414 10,461
09/30/93 10,575 10,575
10/31/93 10,627 10,602
11/30/93 10,535 10,508
12/31/93 10,719 10,701
01/31/94 10,846 10,816
02/28/94 10,576 10,581
03/31/94 10,240 10,299
04/30/94 10,285 10,375
05/31/94 10,363 10,427
06/30/94 10,327 10,408
07/31/94 10,454 10,555
08/31/94 10,527 10,610
09/30/94 10,339 10,509
10/31/94 10,152 10,403
11/30/94 9,932 10,251
12/31/94 10,117 10,407
01/31/95 10,347 10,601
02/28/95 10,625 10,840
03/31/95 10,749 10,953
04/30/95 10,797 10,982
05/31/95 11,105 11,274
06/30/95 11,060 11,265
07/31/95 11,186 11,408
08/31/95 11,301 11,543
09/30/95 11,341 11,587
10/31/95 11,470 11,688
11/30/95 11,587 11,816
12/31/95 11,656 11,879
01/31/96 11,776 11,994
02/28/96 11,762 11,953
03/31/96 11,570 11,837
04/30/96 11,548 11,816
05/31/96 11,513 11,798
06/30/96 11,563 11,889
07/31/96 11,709 11,988
08/31/96 11,728 11,994
09/30/96 11,817 12,102
10/31/96 11,951 12,233
11/30/96 12,140 12,437
12/31/96 12,093 12,399
01/31/97 12,114 12,444
02/28/97 12,216 12,547
03/31/97 12,065 12,386
04/30/97 12,098 12,450
05/31/97 12,268 12,607
06/30/97 12,396 12,728
07/31/97 12,687 13,023
08/31/97 12,566 12,931
09/30/97 12,720 13,068
10/31/97 12,778 13,145
11/30/97 12,821 13,191
12/31/97 13,000 13,353
</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 the Fund to
a hypothetical investment in a relevant market index. 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.
-23-
<PAGE>
REPORT FROM THE FUND MANAGER
- --------------------------------------------------------------------------------
lower-yielding bonds, replacing them with longer, higher-yielding bonds. As the
year progressed, and the curve flattened, I did fewer trades as they became less
advantageous to the Fund.
I plan to continue managing the Fund with the same philosophy as in the past,
and to take advantage of market conditions to increase yield and add value.
Mary V. Metastasio
- --------------------------------------------------------------------------------
Mary Metastasio joined SAFECO's investment department in 1985 as a securities
analyst and began managing the SAFECO Intermediate-Term Municipal Bond Fund in
1996. She holds a B.A. in Dramatic Art from Whitman College and an M.B.A. from
the University of Washington.
- --------------------------------------------------------------------------------
HIGHLIGHTS
- --------------------------------------------------------------------------------
CURRENT YIELD (30-DAY) . . . . . . . . . . . . . . . . . . . . . 3.84%
WEIGHTED AVERAGE MATURITY. . . . . . . . . . . . . . . . . . . . 6.9 YEARS
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- --------------------------------------------------------------------------------
North Carolina Municipal Power Agency #1 Catawba
Electric Revenue. . . . . . . . . . . . . . . . . . . . . . . 5.7%
New York State Housing Finance Agency Health Facilities
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6
Mississippi Hospital Equipment & Facilities Authority. . . . . . 4.6
Oklahoma Industries Authority Health Facilities. . . . . . . . . 4.6
Trinity River Authority (TX) . . . . . . . . . . . . . . . . . . 4.5
PERCENT OF
TOP FIVE STATES NET ASSETS
- --------------------------------------------------------------------------------
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . 16%
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Texas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
California . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
S&P CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
- --------------------------------------------------------------------------------
[CHART]
(1) AAA: 60%
(2) AA: 11%
(3) A: 18%
(4) BBB: 9%
(5) B: 3%
(6) Not Rated: 2%
(7) Cash and Other: -3%
-24-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INTERMEDIATE-TERM
MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C> <C>
BONDS - 103.2%
ALASKA - 2.0%
$250 Anchorage Hospital Revenue
(Sisters of Providence)
6.75%, due 10/01/01. . . . . . . . . . . . . . . . $271
CALIFORNIA - 8.9%
230 Pleasanton Joint Powers
Financing Authority
Reassessment Revenue
5.80%, due 9/02/02 . . . . . . . . . . . . . . . . 243
425 Sacramento Municipal Utility
District Electric Revenue
5.50%, due 2/01/11 . . . . . . . . . . . . . . . . 451
500 Santa Margarita Dana Point
Authority Revenue
5.375%, due 8/01/04. . . . . . . . . . . . . . . . 534
CONNECTICUT - 4.0%
100 Connecticut Housing Finance
Authority Housing Mortgage
Finance Program
5.40%, due 5/15/03 . . . . . . . . . . . . . . . . 104
400 East Haven Connecticut
General Obligation
6.50%, due 9/01/05 [FGIC]* . . . . . . . . . . . . 456
DISTRICT OF COLUMBIA - 3.4%
District of Columbia General
Obligation
150 5.75%, due 6/01/03 . . . . . . . . . . . . . . . . 158
300 5.20%, due 6/01/03 . . . . . . . . . . . . . . . . 308
GEORGIA - 3.0%
Georgia Municipal Electric
Authority General Power Revenue
100 5.75%, due 1/01/03 . . . . . . . . . . . . . . . . 106
300 4.75%, due 1/01/04 . . . . . . . . . . . . . . . . 305
ILLINOIS - 14.9%
$100 Illinois Health Facilities Authority
Revenue (Brokaw-Mennonite
Association)
5.60%, due 8/15/01 [FGIC]. . . . . . . . . . . . . $105
300 Illinois Health Facilities Authority
Revenue (Masonic Medical
Center)
5.20%, due 10/01/03. . . . . . . . . . . . . . . . 310
500 Joliet Waterworks and
Sewerage Revenue
7.00%, due 1/01/05 [FGIC]. . . . . . . . . . . . . 581
Metropolitan Pier and Exposition
Authority (McCormick Place
Expansion Project)
100 5.90%, due 6/15/03 . . . . . . . . . . . . . . . . 108
500 5.50%, due 6/15/03 [MBIA]. . . . . . . . . . . . . 530
400 Peoria IL UT GO
5.00%, due 1/01/06 (FGIC). . . . . . . . . . . . . 414
INDIANA - 3.1%
200 Hammond Multi-School Building
Corp. First Mortgage (Lake
County)
5.50%, due 1/15/03 . . . . . . . . . . . . . . . . 212
100 Indiana Bond Bank State
Revolving Fund Program
5.90%, due 2/01/03 . . . . . . . . . . . . . . . . 108
100 Indianapolis Local Public
Improvement Bond Bank
Transportation Revenue
5.80%, due 7/01/03 . . . . . . . . . . . . . . . . 108
KENTUCKY - 3.9%
500 Kentucky State Property and
Buildings Commission Revenue
5.50%, due 9/01/04 . . . . . . . . . . . . . . . . 533
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-25-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C> <C>
LOUISIANA - 1.4%
$100 Louisiana Correctional Facilities
Corp. Lease Revenue
5.55%, due 12/15/02 [FSA]. . . . . . . . . . . . . $105
85 Louisiana Public Facilities
Authority Student Loan Revenue
6.20%, due 3/01/01 . . . . . . . . . . . . . . . . 89
MASSACHUSETTS - 3.1%
400 Massachusetts Water Resources
Authority General Revenue
5.25%, due 12/01/08. . . . . . . . . . . . . . . . 424
MISSISSIPPI - 4.6%
600 Mississippi Hospital Equipment
and Facilities Authority
Revenue (Mississippi Baptist
Medical Center)
5.40%, due 5/01/04 [MBIA]. . . . . . . . . . . . . 635
NEW JERSEY - 0.7%
100 New Jersey Housing & Mortgage
Finance Agency Housing
Revenue
6.00%, due 11/01/02. . . . . . . . . . . . . . . . 104
NEW YORK - 10.1%
100 Metropolitan Transportation
Authority Transit Facilities
Service Contract Revenue
5.375%, due 7/01/02. . . . . . . . . . . . . . . . 104
400 New York City Municipal Water
Finance Authority
5.00%, due 6/15/03 . . . . . . . . . . . . . . . . 413
100 New York Dormitory Authority
State University Educational
Facilities Revenue
5.75%, due 5/15/01 . . . . . . . . . . . . . . . . 105
700 NYS HFA Health Facility
6.375%, due 11/01/04 . . . . . . . . . . . . . . . 771
NORTH CAROLINA - 7.3%
$210 North Carolina Eastern Municipal
Power Agency System Revenue
5.50%, due 1/01/02 . . . . . . . . . . . . . . . . $217
800 North Carolina Municipal Power
Agency #1 Catawba Electric
Revenue
4.10%, due 1/01/05 [AMBAC] . . . . . . . . . . . . 789
OKLAHOMA - 4.6%
600 Oklahoma Industries Authority
Health Facilities Revenue
(Sisters of Mercy Health System,
St. Louis, Inc.)
5.20%, due 6/01/05 . . . . . . . . . . . . . . . . 629
PENNSYLVANIA - 1.8%
250 Philadelphia Water and
Wastewater Revenue
5.00%, due 6/15/02 . . . . . . . . . . . . . . . . 256
TEXAS - 10.8%
250 City of Austin Combined Utility
Systems Revenue Refunding
Bonds Series 1993
5.25%, due 11/15/06. . . . . . . . . . . . . . . . 274
100 Coastal Bend Health Facility
Development Corp. Health
Services Revenue (Incarnate
Word)
5.70%, due 1/01/03 [AMBAC] . . . . . . . . . . . . 106
100 Houston Sewer System Junior
Lien Revenue
5.75%, due 12/01/02. . . . . . . . . . . . . . . . 107
350 Socorro Independent School
District Unlimited Tax General
Obligation
5.80%, due 2/15/11 . . . . . . . . . . . . . . . . 378
600 Trinity River Authority Revenue
(Tarrant County Water Project)
5.25%, due 2/01/05 [AMBAC] . . . . . . . . . . . . 625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-26-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------------------------------------
<S> <C> <C>
WASHINGTON - 15.6%
$400 Clark County Washington Public
Utility District #001 Generating
System Revenue
6.00%, due 1/01/07 [FGIC]. . . . . . . . . . . . .$ 445
500 Snohomish & Island Counties WA
School Dist. No. 401 (Stanwood)
General Obligation
5.90%, due 12/15/11 [MBIA] . . . . . . . . . . . . 542
500 Tacoma Electric System Revenue
5.80%, due 1/01/04 [FGIC]. . . . . . . . . . . . . 540
100 Washington Health Care Facilities
Authority Revenue (Empire Health
Service, Spokane)
5.50%, due 11/01/03 [MBIA] . . . . . . . . . . . . 106
Washington Public Power
Supply System Nuclear
Project #2 Revenue
200 5.30%, due 7/01/02 . . . . . . . . . . . . . . . . 208
300 4.80%, due 7/01/04 . . . . . . . . . . . . . . . . 305
-------
TOTAL BONDS . . . . . . . . . . . . . . . . . . . . . . . . .$14,222
-------
TOTAL INVESTMENTS - 103.2% . . . . . . . . . . . . . . . . . . . . . .$14,222
Liabilities, less Other Assets . . . . . . . . . . . . . . . . . . . . (442)
-------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$13,780
-------
-------
</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 portfolio bonds they guarantee
at the period end are as follows:
FGIC: Financial Guaranty
Insurance Corp.. . . . . . . . . . . . . . . . . . . . . . . . 18.4%
MBIA: Municipal Bond Investors
Assurance Corp.. . . . . . . . . . . . . . . . . . . . . . . . 13.2
AMBAC: AMBAC Indemnity Corp.. . . . . . . . . . . . . . . . . . . . . 11.0
FSA: Financial Security
Assurance, Inc.. . . . . . . . . . . . . . . . . . . . . . . . 0.8
-------
43.4%
-------
-------
SEE NOTES TO FINANCIAL STATEMENTS
-27-
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1997
<TABLE>
<CAPTION>
SAFECO SAFECO
INTERMEDIATE-TERM INSURED
(In Thousands, Except MUNICIPAL MUNICIPAL
Per-Share Amounts) BOND FUND BOND FUND
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at Cost $ 13,451 $ 14,821
--------- ---------
--------- ---------
Investments, at Value $ 14,222 $ 16,318
Cash 2 --
Receivables
Trust Shares Sold 1 22
Interest 213 240
--------- ---------
Total Assets 14,438 16,580
LIABILITIES
Payables
Investment Securities Purchased -- --
Trust Shares Redeemed 10 1
Dividends 25 38
Investment Advisory Fees 8 11
Notes Payable 600 --
Other 15 14
--------- ---------
Total Liabilities 658 64
--------- ---------
NET ASSETS $ 13,780 $ 16,516
--------- ---------
--------- ---------
NO-LOAD CLASS:
Net Assets $ 13,780 $ 16,516
Trust Shares Outstanding 1,262 1,454
--------- ---------
Net Asset Value, Offering Price, and
Redemption Price Per Share $ 10.92 $ 11.36
--------- ---------
--------- ---------
CLASS A:
Net Assets -- --
Trust Shares Outstanding
Net Asset Value and Redemption
Price Per Share
Maximum Offering Price Per Share
(Net Asset Value Plus Sales Charge of 4.5%)
CLASS B:
Net Assets -- --
Trust Shares Outstanding
Net Asset Value and Offering Price Per Share*
</TABLE>
- --------------------------------------------------------------------------------
*Redemption price per share is the net asset value less any applicable
contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
-28-
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1997
<TABLE>
<CAPTION>
SAFECO
SAFECO WASHINGTON
SAFECO CALIFORNIA STATE
(In Thousands, Except MUNICIPAL TAX-FREE MUNICIPAL
Per-Share Amounts) BOND FUND INCOME FUND BOND FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments, at Cost $ 430,038 $ 77,291 $ 7,528
---------- --------- --------
---------- --------- --------
Investments, at Value $ 497,651 $ 88,029 $ 8,137
Cash -- -- --
Receivables
Trust Shares Sold 116 21 --
Interest 8,452 1,544 121
---------- --------- --------
Total Assets 506,219 89,594 8,258
LIABILITIES
Payables
Investment Securities Purchased -- -- 329
Trust Shares Redeemed 36 10 --
Dividends 2,085 178 24
Investment Advisory Fees 190 44 5
Notes Payable -- -- --
Other 70 22 13
---------- --------- --------
Total Liabilities 2,381 254 371
---------- --------- --------
NET ASSETS $ 503,838 $ 89,340 $ 7,887
---------- --------- --------
---------- --------- --------
NO-LOAD CLASS:
Net Assets $ 502,946 $ 88,379 $ 7,288
Trust Shares Outstanding 34,641 6,833 665
---------- --------- --------
Net Asset Value, Offering Price,
and Redemption Price Per Share $ 14.52 $ 12.93 $ 10.95
---------- --------- --------
---------- --------- --------
CLASS A:
Net Assets $ 390 $ 460 $ 360
Trust Shares Outstanding 27 35 33
---------- --------- --------
Net Asset Value and Redemption
Price Per Share $ 14.53 $ 12.94 $ 10.95
---------- --------- --------
---------- --------- --------
Maximum Offering Price Per Share
(Net Asset Value Plus Sales
Charge of 4.5%) $ 15.21 $ 13.55 $ 11.47
---------- --------- --------
---------- --------- --------
CLASS B:
Net Assets $ 502 $ 501 $ 239
Trust Shares Outstanding 35 39 22
---------- --------- --------
Net Asset Value and Offering Price
Per Share* $ 14.50 $ 12.93 $ 10.97
---------- --------- --------
---------- --------- --------
</TABLE>
- --------------------------------------------------------------------------------
*Redemption price per share is the net asset value less any applicable
contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
-29-
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
SAFECO SAFECO
INTERMEDIATE-TERM INSURED
MUNICIPAL MUNICIPAL
(In Thousands) BOND FUND BOND FUND
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest $ 725 $ 799
EXPENSES
Investment Advisory Fees 77 95
Transfer Agent Fees 11 11
Shareholder Service Fees -- --
Distribution Fees - Class B -- --
Legal and Auditing Fees 14 14
Custodian Fees 4 5
Reports to Shareholders 1 1
Trustees' Fees 4 4
Other Fees 1 --
Amortization of Organization Expenses 4 4
------ ------
Total Expenses 116 134
------ ------
NET INVESTMENT INCOME 609 665
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net Realized Gain (Loss) on Investments 15 70
Net Change in Unrealized Appreciation 388 766
------ ------
NET GAIN ON INVESTMENTS 403 836
------ ------
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $1,012 $1,501
------ ------
------ ------
</TABLE>
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
-30-
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
SAFECO
SAFECO WASHINGTON
SAFECO CALIFORNIA STATE
MUNICIPAL TAX-FREE MUNICIPAL
(In Thousands) BOND FUND INCOME FUND BOND FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 28,152 $ 4,295 $ 429
EXPENSES
Investment Advisory Fees 2,041 424 49
Transfer Agent Fees 327 60 3
Shareholder Service Fees 1 1 1
Distribution Fees - Class B 1 2 2
Legal and Auditing Fees 24 25 15
Custodian Fees 23 6 4
Reports to Shareholders 39 7 --
Trustees' Fees 6 4 4
Other Fees 13 2 --
Amortization of Organization Expenses -- -- 2
--------- -------- ------
Total Expenses 2,475 531 80
--------- -------- ------
NET INVESTMENT INCOME 25,677 3,764 349
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net Realized Gain (Loss) on Investments 6,632 367 (9)
Net Change in Unrealized Appreciation 17,239 4,618 321
--------- -------- ------
NET GAIN ON INVESTMENTS 23,871 4,985 312
--------- -------- ------
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $ 49,548 $ 8,749 $ 661
--------- -------- ------
--------- -------- ------
</TABLE>
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
-31-
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SAFECO INTERMEDIATE-TERM SAFECO INSURED
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
--------------------------------------------------
FOR THE NINE-MONTH FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
(In Thousands) 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net Investment Income $ 609 $ 473 $ 665 $ 434
Net Realized Gain (Loss) on Investments 15 (7) 70 (19)
Net Change in Unrealized Appreciation 388 162 766 386
-------- -------- -------- --------
Net Change in Net Assets Resulting
from Operations 1,012 628 1,501 801
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income - No-Load Class (609) (473) (665) (434)
-- Class A -- -- -- --
-- Class B -- -- -- --
Net Realized Gain on Investments
-- No-Load Class -- -- -- --
-- Class A -- -- -- --
-- Class B -- -- -- --
-------- -------- -------- --------
Total (609) (473) (665) (434)
NET TRUST SHARE TRANSACTIONS
No-Load Class (795) (964) 2,493 1,062
Class A -- -- -- --
Class B -- -- -- --
-------- -------- -------- --------
Total (795) (964) 2,493 1,062
-------- -------- -------- --------
TOTAL CHANGE IN NET ASSETS (392) (809) 3,329 1,429
NET ASSETS AT BEGINNING OF PERIOD 14,172 14,981 13,187 11,758
-------- -------- -------- --------
NET ASSETS AT END OF PERIOD $ 13,780 $ 14,172 $ 16,516 $ 13,187
-------- -------- -------- --------
-------- -------- -------- --------
- -------------------------------------------------------------------------------------------
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES AND AMOUNTS
SHARES
Sales 204 176 1,204 458
Reinvestments 29 25 23 13
Redemptions (307) (293) (1,000) (368)
-------- -------- -------- --------
Net Change (74) (92) 227 103
-------- -------- -------- --------
-------- -------- -------- --------
AMOUNTS
Sales $ 2,179 $ 1,841 $ 13,174 $ 4,812
Reinvestments 312 263 247 137
Redemptions (3,286) (3,068) (10,928) (3,887)
-------- -------- -------- --------
Net Change $ (795) $ (964) $ 2,493 $ 1,062
-------- -------- -------- --------
-------- -------- -------- --------
- -------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-32-
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO SAFECO CALIFORNIA SAFECO WASHINGTON
MUNICIPAL BOND FUND TAX-FREE INCOME FUND STATE MUNICIPAL BOND FUND
- ----------------------------------------------------------------------------------
FOR THE NINE-MONTH FOR THE NINE-MONTH FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 25,677 $ 19,903 $ 3,764 $ 2,766 $ 349 $ 238
6,632 2,341 367 197 (9) 4
17,239 7,844 4,618 2,196 321 125
--------- --------- -------- -------- -------- --------
49,548 30,088 8,749 5,159 661 367
(25,652) (19,899) (3,744) (2,764) (326) (234)
(17) (3) (9) (1) (15) (3)
(8) (1) (11) (1) (8) (1)
(5,345) -- (360) (200) -- (4)
(4) -- (2) -- -- --
(4) -- (2) -- -- --
--------- --------- -------- -------- -------- --------
(31,030) (19,903) (4,128) (2,966) (349) (242)
3,479 (9,855) 11,712 (652) 440 (52)
66 309 326 120 11 334
382 111 374 100 19 209
--------- --------- -------- -------- -------- --------
3,927 (9,435) 12,412 (432) 470 491
--------- --------- -------- -------- -------- --------
22,445 750 17,033 1,761 782 616
481,393 480,643 72,307 70,546 7,105 6,489
--------- --------- -------- -------- -------- --------
$ 503,838 $ 481,393 $ 89,340 $ 72,307 $ 7,887 $ 7,105
--------- --------- -------- -------- -------- --------
--------- --------- -------- -------- -------- --------
- -------------------------------------------------------------------------------------------
6,156 4,689 2,534 1,648 601 78
1,401 908 231 168 7 4
(7,286) (6,271) (1,773) (1,849) (563) (35)
--------- --------- -------- -------- -------- --------
271 (674) 992 (33) 45 47
--------- --------- -------- -------- -------- --------
--------- --------- -------- -------- -------- --------
$ 86,878 $ 63,875 $ 31,480 $ 19,516 $ 6,413 $ 813
19,903 12,498 2,867 2,025 78 38
(102,854) (85,808) (21,935) (21,973) (6,021) (360)
--------- --------- -------- -------- -------- --------
$ 3,927 $ (9,435) $ 12,412 $ (432) $ 470 $ 491
--------- --------- -------- -------- -------- --------
--------- --------- -------- -------- -------- --------
- -------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-33-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The SAFECO Tax-Exempt Bond Trust ("Trust") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Trust consists of the SAFECO Intermediate-
Term Municipal Bond Fund (Intermediate), SAFECO Insured Municipal Bond Fund
(Insured), SAFECO Municipal Bond Fund (Municipal), SAFECO California Tax-Free
Income Fund (California) and SAFECO Washington State Municipal Bond Fund
(Washington) (together "the Funds").
Effective September 30, 1996, the Municipal, California and
Washington Funds began issuing two new classes of shares--Class A and Class B
shares (collectively, "Advisor Classes"). Unlike the no-load class of shares
(which are sold directly to the shareholder with no associated sales or
distribution charges), these new classes of shares are sold by financial
advisors to shareholders and have associated sales and distribution charges.
Each class of shares represents an interest in the net assets of the fund.
In connection with issuing the new Advisor Classes, the Municipal, California
and Washington Funds adopted a Plan of Distribution (the "Plan"). Under the
Plan, each Advisor Class pays the distributor, SAFECO Securities, Inc., for
selling its shares at the annual rate of .25% of the average daily net asset 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 each Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
permit management to make certain estimates and assumptions at the date of the
financial statements.
SECURITY VALUATION. Tax-exempt bonds are stated on the basis of valuations
provided by a pricing service, which uses information with
-34-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Short-term investments are valued at 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 may be settled a month or more after the trade date. The
securities purchased are carried in the portfolio at market and are subject to
market fluctuation during this period. These securities begin earning interest
on the settlement date. As commitments to purchase when-issued securities become
fixed, the Funds segregate liquid assets in an amount equal to the total
obligation.
INCOME RECOGNITION. Interest is accrued on portfolio investments daily. Bond
premiums and original issue discounts are amortized to either call or maturity
dates. Market discount on bonds purchased after April 30, 1993, is recorded as
taxable income at disposition.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Net investment income is
declared as a dividend to shareholders of record as of the close of each
business day and payment is made as of the last business day of each month. Net
gains realized from security transactions, if any, will normally be distributed
to shareholders at the end of December.
FEDERAL INCOME AND EXCISE TAXES. Each Fund intends to continue to comply
with the requirements of the Internal Revenue Code applicable to regulated
investment companies by distributing substantially all income to 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 Funds intend to satisfy
conditions 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.
-35-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT TRANSACTIONS
<TABLE>
<CAPTION>
SAFECO
SAFECO SAFECO SAFECO WASHINGTON
INTERMEDIATE- INSURED SAFECO CALIFORNIA STATE
TERM MUNICIPAL MUNICIPAL MUNICIPAL TAX-FREE MUNICIPAL
(In Thousands) BOND FUND BOND FUND BOND FUND INCOME FUND BOND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PURCHASES* FOR THE YEAR ENDED
DECEMBER 31, 1997 $ 1,448 $ 2,342 $ 64,408 $ 19,301 $ 1,575
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
SALES* FOR THE YEAR ENDED
DECEMBER 31, 1997 $ 1,574 $ 1,792 $ 72,484 $ 7,242 $ 858
-------- -------- --------- --------- --------
-------- -------- --------- --------- --------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Excludes short-term securities.
4. COMPONENTS OF NET ASSETS
At December 31, 1997, the components of net assets were as follows:
<TABLE>
<CAPTION>
SAFECO
SAFECO SAFECO SAFECO WASHINGTON
INTERMEDIATE- INSURED SAFECO CALIFORNIA STATE
TERM MUNICIPAL MUNICIPAL MUNICIPAL TAX-FREE MUNICIPAL
(In Thousands) BOND FUND BOND FUND BOND FUND INCOME FUND BOND FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate gross unrealized
appreciation for investment
securities in which there
is an excess of value over
identified cost $ 771 $ 1,497 $ 67,633 $ 10,738 $ 609
Aggregate gross unrealized
depreciation for investment
securities in which there
is an excess of identified
cost over value -- -- (20) -- --
---------- ---------- ----------- ---------- --------
Net unrealized appreciation 771 1,497 67,613 10,738 609
Paid in capital (par value $.001,
unlimited shares authorized) 13,009 15,019 436,225 78,602 7,278
---------- ---------- ----------- ---------- --------
Net Assets at December 31, 1997 $ 13,780 $ 16,516 $ 503,838 $ 89,340 $ 7,887
---------- ---------- ----------- ---------- --------
---------- ---------- ----------- ---------- --------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-36-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
5. INVESTMENT ADVISORY FEES AND OTHER
TRANSACTIONS WITH AFFILIATES
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>
INTERMEDIATE FUND:
First $250 million .55%
Next $250 million .45
Next $250 million .35
Over $750 million .25
MUNICIPAL & CALIFORNIA FUNDS:
First $100 million .55%
Next $150 million .45
Next $250 million .35
Over $500 million .25
INSURED & WASHINGTON FUNDS:
First $250 million .65%
Next $250 million .55
Next $250 million .45
Over $750 million .35
</TABLE>
TRANSFER AGENT FEES. SAFECO Services Corporation receives transfer agent
fees.
NOTES PAYABLE AND INTEREST EXPENSE. The Funds may borrow money for temporary
purposes from SAFECO Corporation or its affiliates. Interest rates equivalent
to commercial bank interest rates are charged on loans over $100,000. No
interest is charged on loans under $100,000. At December 31, 1997, the
Intermediate Municipal Bond Fund had a 5.68% note payable of $600,000 to SAFECO
Life Insurance Company of America. The note was repaid on January 2, 1998.
AFFILIATE OWNERSHIP. At December 31, 1997, SAFECO Insurance Company of
America owned 397,434 shares (32%) of the Intermediate Fund, 605,644 shares
(42%) of the Insured Fund and 502,372 shares (70%) of the Washington Fund.
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 arrangement with certain financial institutions.
Under these arrangements, $75 million is available to meet short-term financing
needs. No balance was outstanding under these arrangements at December 31, 1997.
DEALER CONCESSIONS. SAFECO Securities, Inc., retained the following amounts
in dealer commissions from sales of Class A shares during the year ended
December 31, 1997.
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED
- --------------------------------------------------------------------------------
<S> <C>
Municipal Bond Fund $332
California Tax-Free Income Fund 57
Washington State Municipal Bond Fund --
- --------------------------------------------------------------------------------
</TABLE>
-37-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM MUNICIPAL BOND FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 FOR THE YEAR ENDED MARCH 31
----------- ------------ ---------------------------
1997 1996 1996 1995 1994
- -------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.61 $ 10.49 $ 10.17 $ 10.13 $ 10.25
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.47 0.35 0.45 0.45 0.40
Net Realized and Unrealized
Gain (Loss) on Investments 0.31 0.12 0.32 0.04 (0.12)
-------- -------- -------- ------- -------
Total from Investment
Operations 0.78 0.47 0.77 0.49 0.28
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.47) (0.35) (0.45) (0.45) (0.40)
-------- -------- -------- ------- -------
Net Asset Value at End of Period $ 10.92 $ 10.61 $ 10.49 $ 10.17 $ 10.13
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Total Return 7.50% 4.53%* 7.63% 4.97% 2.64%
NET ASSETS AT END OF PERIOD (000'S) $ 13,780 $ 14,172 $ 14,981 $13,762 $10,781
RATIO OF EXPENSES TO AVERAGE NET
ASSETS 0.83% 0.89%** 0.84% 0.85% 0.99%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 4.37% 4.40%** 4.29% 4.46% 3.85%
PORTFOLIO TURNOVER RATE 10.52% 12.81%** 9.12% 4.27% 1.49%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-38-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INSURED MUNICIPAL BOND FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 FOR THE YEAR ENDED MARCH 31
----------- ------------ ---------------------------
1997 1996 1996 1995 1994
- -------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.74 $ 10.46 $ 10.05 $ 9.73 $ 10.26
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.50 0.37 0.48 0.48 0.41
Net Realized and Unrealized
Gain (Loss) on Investments 0.62 0.28 0.41 0.32 (0.53)
-------- -------- -------- ------- -------
Total from Investment
Operations 1.12 0.65 0.89 0.80 (0.12)
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.50) (0.37) (0.48) (0.48) (0.41)
-------- -------- -------- ------- -------
Net Asset Value at End of Period $ 11.36 $ 10.74 $ 10.46 $ 10.05 $ 9.73
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Total Return 10.70% 6.31%* 8.95% 8.58% (1.40)%
NET ASSETS AT END OF PERIOD (000'S) $ 16,516 $ 13,187 $ 11,758 $ 8,163 $ 3,306
RATIO OF EXPENSES TO AVERAGE NET
ASSETS 0.92% 1.00%** 0.99% 1.08% 1.41%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 4.56% 4.66%** 4.53% 5.11% 3.99%
PORTFOLIO TURNOVER RATE 13.02% 14.86%** 3.71% 14.76% 21.19%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-39-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MUNICIPAL BOND FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 FOR THE YEAR ENDED MARCH 31
----------- ------------ ---------------------------------
1997 1996 1996 1995 1994
- -------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.98 $ 13.69 $ 13.36 $ 13.27 $ 14.13
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.75 0.57 0.76 0.77 0.78
Net Realized and Unrealized
Gain (Loss) on Investments 0.70 0.29 0.33 0.12 (0.55)
-------- -------- -------- -------- --------
Total from Investment
Operations 1.45 0.86 1.09 0.89 0.23
Less Distributions
Dividends from Net Investment
Income (0.75) (0.57) (0.76) (0.77) (0.78)
Distributions from Realized
Gains (0.16) -- -- (0.03) (0.31)
-------- -------- -------- -------- --------
Total Distributions (0.91) (0.57) (0.76) (0.80) (1.09)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 14.52 $ 13.98 $ 13.69 $ 13.36 $ 13.27
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN 10.68% 6.42%* 8.23% 7.10% 1.30%
NET ASSETS AT END OF PERIOD (000'S) $502,946 $480,970 $480,643 $472,569 $507,453
RATIO OF EXPENSES TO AVERAGE NET
ASSETS 0.51% 0.53%** 0.54% 0.56% 0.52%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 5.31% 5.53%** 5.47% 5.96% 5.49%
PORTFOLIO TURNOVER RATE 13.52% 6.66%** 12.60% 26.96% 22.07%
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-40-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------- --------------------------
FOR THE THREE-MONTH FOR THE THREE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
- ----------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 13.99 $ 13.82 $ 13.98 $ 13.82
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.68 0.18 0.60 0.15
Net Realized and Unrealized
Gain on Investments 0.70 0.17 0.68 0.16
-------- ------- -------- --------
Total from Investment Operations 1.38 0.35 1.28 0.31
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.68) (0.18) (0.60) (0.15)
Distributions from Realized Gains (0.16) -- (0.16) --
-------- ------- ------- --------
Total Distributions (0.84) (0.18) (0.76) (0.15)
-------- ------- ------- --------
NET ASSET VALUE AT END OF PERIOD $ 14.53 $ 13.99 $ 14.50 $ 13.98
-------- ------- ------- --------
-------- ------- ------- --------
TOTAL RETURN+ 10.17% 2.52%* 9.41% 2.27%*
NET ASSETS AT END OF PERIOD (000'S) $ 390 $ 311 $ 502 $ 112
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.95% 0.82%** 1.53% 1.50%**
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 4.86% 5.04%** 4.22% 4.42%**
PORTFOLIO TURNOVER RATE 13.52% 6.66%** 13.52% 6.66%**
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effect of sales charges. If the sales charges were included,
the total return would be lower.
-41-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 FOR THE YEAR ENDED MARCH 31
----------- ------------ ---------------------------
1997 1996 1996 1995 1994
- -------------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 12.22 $ 11.86 $ 11.54 $ 11.51 $ 12.23
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.60 0.47 0.62 0.63 0.66
Net Realized and Unrealized
Gain (Loss) on Investments 0.76 0.39 0.40 0.13 (0.38)
-------- --------- --------- --------- ---------
Total from Investment Operations 1.36 0.86 1.02 0.76 0.28
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.60) (0.47) (0.62) (0.63) (0.66)
Distributions from Realized Gains (0.05) (0.03) (0.08) (0.10) (0.34)
-------- --------- --------- --------- ---------
Total Distributions (0.65) (0.50) (0.70) (0.73) (1.00)
-------- --------- --------- --------- ---------
NET ASSET VALUE AT END OF PERIOD $ 12.93 $ 12.22 $ 11.86 $ 11.54 $ 11.51
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
TOTAL RETURN 11.55% 7.42%* 8.87% 7.01% 1.97%
NET ASSETS AT END OF PERIOD (000'S) $ 88,379 $ 72,084 $ 70,546 $ 64,058 $ 77,056
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.68% 0.69%** 0.68% 0.70% 0.68%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 4.88% 5.21%** 5.12% 5.65% 5.31%
PORTFOLIO TURNOVER RATE 9.83% 10.52%** 16.25% 44.10% 32.58%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-42-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO CALIFORNIA TAX-FREE INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------- --------------------------
FOR THE THREE-MONTH FOR THE THREE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
- ----------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 12.23 $ 12.07 $ 12.22 $ 12.07
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.58 0.15 0.48 0.12
Net Realized and Unrealized
Gain on Investments 0.76 0.19 0.76 0.18
--------- -------- -------- --------
Total from Investment Operations 1.34 0.34 1.24 0.30
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.58) (0.15) (0.48) (0.12)
Distributions from Realized Gains (0.05) (0.03) (0.05) (0.03)
--------- -------- -------- --------
Total Distributions (0.63) (0.18) (0.53) (0.15)
--------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 12.94 $ 12.23 $ 12.93 $ 12.22
--------- -------- -------- --------
--------- -------- -------- --------
TOTAL RETURN+ 11.29% 2.83%* 10.46% 2.56%*
NET ASSETS AT END OF PERIOD (000'S) $ 460 $ 122 $ 501 $ 101
RATIO OF EXPENSES TO AVERAGE NET ASSETS 0.91% 0.89%** 1.63% 1.64%**
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS 4.52% 4.84%** 3.71% 4.08%**
PORTFOLIO TURNOVER RATE 9.83% 10.52%** 9.83% 10.52%**
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Not Annualized.
** Annualized.
+ Excludes the effect of sales charges. If the sales charges were included,
the total return would be lower.
-43-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 FOR THE YEAR ENDED MARCH 31
----------- ------------ ---------------------------
1997 1996 1996 1995 1994
- ------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.53 $ 10.34 $ 10.10 $ 9.91 $ 10.27
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.50 0.37 0.50 0.49 0.44
Net Realized and Unrealized
Gain (Loss) on Investments 0.42 0.20 0.27 0.19 (0.35)
-------- -------- -------- -------- --------
Total from Investment Operations 0.92 0.57 0.77 0.68 0.09
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.50) (0.37) (0.50) (0.49) (0.44)
Distributions from Realized Gains 0.00 (0.01) (0.03) -- (0.01)
-------- -------- -------- -------- --------
Total Distributions (0.50) (0.38) (0.53) (0.49) (0.45)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 10.95 $ 10.53 $ 10.34 $ 10.10 $ 9.91
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN 8.94% 5.61%* 7.73% 7.13% 0.68%
NET ASSETS AT END OF PERIOD (000'S) $ 7,288 $ 6,558 $ 6,489 $ 5,953 $ 2,908
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.02% 1.10%** 1.07% 1.09% 1.44%
RATIO OF NET INVESTMENT INCOME
TO AVERAGE NET ASSETS 4.68% 4.78%** 4.78% 5.06% 4.17%
PORTFOLIO TURNOVER RATE 11.67% 15.96%** 20.86% 9.23% 17.26%
- --------------------------------------------------------------------------------------------------
</TABLE>
* Not Annualized.
** Annualized.
-44-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO WASHINGTON STATE MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------- --------------------------
FOR THE THREE-MONTH FOR THE THREE-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1996
- ----------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.53 $ 10.45 $ 10.55 $ 10.45
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.46 0.12 0.38 0.10
Net Realized and Unrealized
Gain on Investments 0.42 0.09 0.42 0.11
--------- -------- -------- --------
Total from Investment Operations 0.88 0.21 0.80 0.21
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.46) (0.12) (0.38) (0.10)
Distributions from Realized Gains 0.00 (0.01) 0.00 (0.01)
--------- -------- -------- --------
Total Distributions (0.46) (0.13) (0.38) (0.11)
--------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 10.95 $ 10.53 $ 10.97 $ 10.55
--------- -------- -------- --------
--------- -------- -------- --------
TOTAL RETURN+ 8.64% 1.94%* 7.75% 1.94%*
NET ASSETS AT END OF PERIOD (000'S) $ 360 $ 336 $ 239 $ 211
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.32% 1.31%** 2.13% 2.06%**
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS 4.39% 4.49%** 3.58% 3.71%**
PORTFOLIO TURNOVER RATE 11.67% 15.96%** 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.
-45-
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE
SAFECO TAX-EXEMPT BOND TRUST
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the SAFECO Tax-Exempt Bond Trust
(comprising, respectively, the SAFECO Intermediate-Term Municipal Bond Fund,
SAFECO Insured Municipal Bond Fund, SAFECO Municipal Bond Fund, SAFECO
California Tax-Free Income Fund, and SAFECO Washington State Municipal Bond
Fund) as of December 31, 1997, and the related statements of operations, the
statements of changes in net assets, and the financial highlights for each of
the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective funds constituting the SAFECO Tax-Exempt Bond Trust at
December 31, 1997, the results of their operations, the changes in their net
assets, and the financial highlights for each of the periods indicated therein,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP.
Seattle, Washington
January 30, 1998
-46-
<PAGE>
- --------------------------------------------------------------------------------
SAFECO FAMILY OF FUNDS
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
TAXABLE BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME
WITH LONG-TERM GROWTH
SAFECO Income Fund
SAFECO Balanced Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
- --------------------------------------------------------------------------------
For more complete information on any SAFECO Mutual Fund, including management
fees and expenses, call or write for a free Prospectus. Please read it carefully
before you invest or send money.
-47-
<PAGE>
SAFECO MONEY MARKET 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
INDEPENDENT AUDITORS:
Ernst & Young, LLP
FOR SHAREHOLDER SERVICE:
Monday-Friday,
5:30am-7:00pm Pacific Time
NATIONWIDE: 1-800-624-5711
SEATTLE: (206) 545-7319
DEAF AND HARD OF HEARING
TTY/TDD SERVICE: 1-800-438-8718
FOR 24-HOUR AUTOMATED
PERFORMANCE INFORMATION
AND TRANSACTIONS:
NATIONWIDE: 1-800-835-4391
SEATTLE: (206) 545-5113
MAILING ADDRESS:
SAFECO Mutual Funds
P.O. Box 34890
Seattle, WA 98124-1890
INTERNET:
www.safecofunds.com
EMAIL: [email protected]
GMF 713 2/98
Printed on Recycled Paper.
This report must be preceded or accompanied by a current prospectus.
- - Registered Trademark-Registered trademark of SAFECO Corporation.
