<PAGE> 1
MARCH 31, 1996
[GRAPHIC]
SEMIANNUAL REPORT
SAFECO HIGH-YIELD BOND FUND
SAFECO GNMA FUND
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
[LOGO - SAFECO MUTUAL FUNDS]
<PAGE> 2
PERFORMANCE INFORMATION
MARCH 31, 1996
SAFECO HIGH-YIELD BOND FUND
ILLUSTRATION OF A $10,000 INVESTMENT
- -----------------------------------------------
[GRAPH 1]
INVESTMENT VALUE AS OF MARCH 31, 1996
<TABLE>
<S> <C>
SAFECO HIGH-YIELD BOND FUND $19,180
MERRIL LYNCH HIGH-YIELD INDEX $23,065
</TABLE>
Chart appears here comparing the total return of a $10,000 investment in the
Fund made since inception compared to the performance of the applicable index.
<TABLE>
<CAPTION>
MERRILL LYNCH
DATE HY FUND HY INDEX
---- ------- -------------
<S> <C> <C>
09/30/88 10,000 10,000
10/31/88 10,121 10,144
11/30/88 10,122 10,163
12/31/88 10,236 10,207
01/31/89 10,399 10,374
02/28/89 10,435 10,436
03/31/89 10,368 10,395
04/30/89 10,311 10,399
05/31/89 10,473 10,595
06/30/89 10,617 10,757
07/31/89 10,679 10,800
08/31/89 10,660 10,850
09/30/89 10,610 10,736
10/31/89 10,471 10,470
11/30/89 10,452 10,485
12/31/89 10,439 10,443
01/31/90 10,283 10,161
02/28/90 10,077 10,007
03/31/90 10,280 10,196
04/30/90 10,341 10,259
05/31/90 10,545 10,430
06/30/90 10,665 10,692
07/31/90 10,910 10,961
08/31/90 10,576 10,460
09/30/90 10,181 10,030
10/31/90 9,854 9,736
11/30/90 9,963 9,838
12/31/90 10,063 9,987
01/31/91 10,010 10,192
02/28/91 10,423 11,076
03/31/91 10,791 11,625
04/30/91 11,120 12,026
05/31/91 11,253 12,073
06/30/91 11,376 12,347
07/31/91 11,627 12,678
08/31/91 11,854 12,970
09/30/91 12,032 13,153
10/31/91 12,310 13,600
11/30/91 12,464 13,746
12/31/91 12,508 13,899
01/31/92 12,856 14,369
02/28/92 13,079 14,732
03/31/92 13,220 14,939
04/30/92 13,212 15,017
05/31/92 13,390 15,239
06/30/92 13,563 15,414
07/31/92 13,796 15,714
08/31/92 13,967 15,914
09/30/92 14,140 16,083
10/31/92 13,862 15,876
11/30/92 14,096 16,119
12/31/92 14,243 16,324
01/31/93 14,632 16,713
02/28/93 14,922 17,012
03/31/93 15,176 17,301
04/30/93 15,286 17,420
05/31/93 15,517 17,646
06/30/93 15,811 17,975
07/31/93 15,997 18,156
08/31/93 16,106 18,322
09/30/93 16,160 18,403
10/31/93 16,389 18,753
11/30/93 16,515 18,851
12/31/93 16,652 19,049
01/31/94 16,966 19,461
02/28/94 16,883 19,326
03/31/94 16,286 18,701
04/30/94 16,155 18,469
05/31/94 16,302 18,428
06/30/94 16,373 18,512
07/31/94 16,367 18,634
08/31/94 16,427 18,772
09/30/94 16,421 18,768
10/31/94 16,355 18,818
11/30/94 16,140 18,656
12/31/94 16,277 18,852
01/31/95 16,468 19,117
02/28/95 16,815 19,730
03/31/95 16,968 19,996
04/30/95 17,289 20,513
05/31/95 17,743 21,146
06/30/95 17,833 21,289
07/31/95 18,069 21,566
08/31/95 18,077 21,679
09/30/95 18,298 21,936
10/31/95 18,551 22,116
11/30/95 18,582 22,336
12/31/95 18,823 22,710
01/31/96 19,060 23,089
02/28/96 19,243 23,160
03/31/96 19,180 23,065
</TABLE>
The Fund's inception was September 7, 1988. Index graph comparison begins
September 30, 1988.
The performance of the Funds assumes the reinvestment of all interest
and capital gains. Operating expenses have been applied to the Funds, but not to
the indices.
If Fund operating expenses had been applied to the indices, their
values would have been lower. Investment returns are historical and not
predictive of future performance. The Merrill Lynch High-Yield Index, GNMA Index
and Intermediate-Term Treasury Index are representative total return benchmarks
for the respective funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL SINCE
TOTAL RETURN 1 YEAR 5 YEAR INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SAFECO High-Yield
Bond Fund (Inception 9/7/88) 13.03% 12.19% 9.07%
Merrill Lynch High-Yield Index 15.35% 14.69% 11.79%
- --------------------------------------------------------------------------------
SAFECO GNMA Fund
(Inception 7/15/86) 8.79% 6.90% 7.30%
Merrill Lynch GNMA
Mortgage Index 10.92% 8.45% 9.39%
- --------------------------------------------------------------------------------
SAFECO Intermediate-Term U.S.
Treasury Fund
(Inception 9/7/88) 9.58% 7.47% 7.66%
Merrill Lynch Intermediate-Term
Treasury Index 9.18% 7.62% 8.37%
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
SAFECO GNMA FUND
ILLUSTRATION OF A $10,000 INVESTMENT
[GRAPH 2]
GNMA Fund
<TABLE>
<CAPTION>
Since
1 Year 5 Year Inception
---------------------------------------------------
<S> <C> <C> <C>
SAFECO GNMA Fund 8.79 6.90 7.30
Merrill Lynch GNMA Mortgage Index 10.92 8.45 9.39
</TABLE>
Chart appears here comparing the total return of a $10,000 investment in the
Fund made since inception as compared to the performance of the applicable
index.
<TABLE>
<CAPTION>
MERRILL LYNCH
DATE GNMA FUND GNMA INDEX
------------------------------------------
<S> <C> <C>
07/31/86 10,000 10,000
08/31/86 10,118 10,178
09/30/86 10,171 10,204
10/31/86 10,244 10,336
11/30/86 10,301 10,514
12/31/86 10,338 10,565
01/31/87 10,448 10,704
02/28/87 10,541 10,807
03/31/87 10,529 10,811
04/30/87 10,113 10,472
05/31/87 10,092 10,436
06/30/87 10,254 10,622
07/31/87 10,315 10,650
08/31/87 10,312 10,595
09/30/87 10,108 10,287
10/31/87 10,228 10,672
11/30/87 10,340 10,807
12/31/87 10,430 10,919
01/31/88 10,633 11,401
02/28/88 10,721 11,533
03/31/88 10,688 11,425
04/30/88 10,712 11,347
05/31/88 10,625 11,306
06/30/88 10,841 11,628
07/31/88 10,829 11,584
08/31/88 10,841 11,592
09/30/88 11,022 11,881
10/31/88 11,316 12,169
11/30/88 11,256 11,983
12/31/88 11,244 11,928
01/31/89 11,363 12,134
02/28/89 11,329 12,049
03/31/89 11,340 12,053
04/30/89 11,528 12,283
05/31/89 11,819 12,662
06/30/89 12,107 13,056
07/31/89 12,372 13,287
08/31/89 12,207 13,123
09/30/89 12,262 13,180
10/31/89 12,484 13,517
11/30/89 12,620 13,678
12/31/89 12,698 13,759
01/31/90 12,557 13,615
02/28/90 12,614 13,737
03/31/90 12,629 13,755
04/30/90 12,456 13,625
05/31/90 12,837 14,059
06/30/90 13,009 14,290
07/31/90 13,247 14,531
08/31/90 13,129 14,519
09/30/90 13,216 14,651
10/31/90 13,328 14,831
11/30/90 13,623 15,160
12/31/90 13,804 15,412
01/31/91 14,000 15,633
02/28/91 14,080 15,742
03/31/91 14,154 15,862
04/30/91 14,307 16,020
05/31/91 14,421 16,148
06/30/91 14,437 16,172
07/31/91 14,667 16,443
08/31/91 14,902 16,753
09/30/91 15,161 17,055
10/31/91 15,385 17,325
11/30/91 15,462 17,443
12/31/91 15,847 17,876
01/31/92 15,627 17,659
02/28/92 15,755 17,834
03/31/92 15,663 17,722
04/30/92 15,779 17,910
05/31/92 16,085 18,241
06/30/92 16,256 18,526
07/31/92 16,488 18,635
08/31/92 16,657 18,908
09/30/92 16,791 19,049
10/31/92 16,618 18,902
11/30/92 16,689 18,999
12/31/92 16,909 19,232
01/31/93 17,158 19,486
02/28/93 17,346 19,667
03/31/93 17,415 19,787
04/30/93 17,476 19,896
05/31/93 17,527 20,002
06/30/93 17,822 20,191
07/31/93 17,895 20,287
08/31/93 18,083 20,327
09/30/93 18,103 20,337
10/31/93 18,133 20,399
11/30/93 17,961 20,407
12/31/93 18,106 20,609
01/31/94 18,308 20,771
02/28/94 18,030 20,674
03/31/94 17,458 20,136
04/30/94 17,306 19,988
05/31/94 17,365 20,029
06/30/94 17,288 19,987
07/31/94 17,621 20,381
08/31/94 17,661 20,437
09/30/94 17,396 20,208
10/31/94 17,350 20,194
11/30/94 17,199 20,143
12/31/94 17,333 20,358
01/31/95 17,688 20,798
02/28/95 18,102 21,354
03/31/95 18,163 21,459
04/30/95 18,395 21,764
05/31/95 18,903 22,414
06/30/95 18,982 22,560
07/31/95 19,005 22,617
08/31/95 19,210 22,858
09/30/95 19,395 23,096
10/31/95 19,545 23,288
11/30/95 19,774 23,541
12/31/95 20,016 23,842
01/31/96 20,149 24,024
02/28/96 19,876 23,834
03/31/96 19,759 23,802
</TABLE>
Current Yield
Weighted Average Maturity
The Fund's inception was July 15, 1986. Index graph comparison begins July 31,
1986.
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
ILLUSTRATION OF A $10,000 INVESTMENT
[GRAPH 3]
Chart appears here comparing the total return of a $10,000 investment in the
Fund made since inception as compared to the performance of the applicable
index.
<TABLE>
<CAPTION>
MERRILL LYNCH
DATE IT TREASURY IT INDEX
-----------------------------------------
<S> <C> <C>
09/30/88 10,000 10,000
10/31/88 10,135 10,136
11/30/88 10,055 10,048
12/31/88 10,067 10,057
01/31/89 10,127 10,156
02/28/89 10,076 10,114
03/31/89 10,093 10,164
04/30/89 10,271 10,351
05/31/89 10,452 10,569
06/30/89 10,689 10,839
07/31/89 10,877 11,060
08/31/89 10,776 10,906
09/30/89 10,820 10,961
10/31/89 11,002 11,186
11/30/89 11,082 11,295
12/31/89 11,105 11,324
01/31/90 11,039 11,259
02/28/90 11,095 11,288
03/31/90 11,088 11,310
04/30/90 11,060 11,270
05/31/90 11,270 11,509
06/30/90 11,384 11,658
07/31/90 11,537 11,826
08/31/90 11,496 11,774
09/30/90 11,540 11,882
10/31/90 11,632 12,047
11/30/90 11,753 12,227
12/31/90 11,900 12,400
01/31/91 11,953 12,526
02/28/91 12,047 12,591
03/31/91 12,132 12,660
04/30/91 12,267 12,791
05/31/91 12,331 12,864
06/30/91 12,346 12,877
07/31/91 12,500 13,016
08/31/91 12,711 13,259
09/30/91 12,902 13,485
10/31/91 13,041 13,637
11/30/91 13,175 13,797
12/31/91 13,509 14,134
01/31/92 13,355 13,991
02/28/92 13,371 14,044
03/31/92 13,323 13,987
04/30/92 13,425 14,115
05/31/92 13,617 14,316
06/30/92 13,830 14,524
07/31/92 14,175 14,793
08/31/92 14,286 14,964
09/30/92 14,551 15,171
10/31/92 14,284 14,985
11/30/92 14,196 14,918
12/31/92 14,396 15,115
01/31/93 14,767 15,397
02/28/93 15,093 15,628
03/31/93 15,154 15,686
04/30/93 15,263 15,810
05/31/93 15,212 15,763
06/30/93 15,581 15,990
07/31/93 15,605 16,022
08/31/93 15,990 16,267
09/30/93 16,080 16,337
10/31/93 16,116 16,366
11/30/93 15,858 16,287
12/31/93 15,956 16,351
01/31/94 16,164 16,514
02/28/94 15,736 16,279
03/31/94 15,405 16,051
04/30/94 15,296 15,942
05/31/94 15,302 15,959
06/30/94 15,273 15,970
07/31/94 15,476 16,168
08/31/94 15,515 16,219
09/30/94 15,346 16,088
10/31/94 15,352 16,092
11/30/94 15,321 16,012
12/31/94 15,380 16,072
01/31/95 15,556 16,339
02/28/95 15,789 16,652
03/31/95 15,870 16,743
04/30/95 16,065 16,935
05/31/95 16,679 17,419
06/30/95 16,790 17,533
07/31/95 16,660 17,545
08/31/95 16,858 17,689
09/30/95 17,045 17,808
10/31/95 17,304 18,008
11/30/95 17,656 18,232
12/31/95 17,956 18,418
01/31/96 18,014 18,576
02/28/96 17,575 18,368
03/31/96 17,391 18,280
</TABLE>
Current Yield
Weighted Average Maturity
The Fund's inception was September 7, 1988. Index graph comparison begins
September 30, 1988.
<PAGE> 4
================================================================================
LETTER FROM THE PRESIDENT
May 1, 1996
[PHOTO]
DAVID F. HILL
DEAR
SHAREHOLDER:
Strong corporate earnings, low interest rates and low inflation helped the
U.S. financial markets continue to post robust returns. As measured by the S&P
500, the stock market advanced 32.07% in the 12 months ended March 31, and 5.37%
in the most recent quarter.
While the domestic stock market kept on advancing at a clip well above its
historical average, the bond market did slow its pace. As measured by the Lehman
Brothers Government/Corporate Index, the bond market finished the 12 months
ended March 31 up 10.93%, and the three months just ended down, -2.34%. The bond
market's decline, which began midway through the first quarter, can be
attributed to unexpected, albeit slight, strength in economic indicators and the
failure to reach a federal budget accord.
In truth, the economic indicators are thoroughly mixed, and that is keeping
the Fed cautious and slow moving. A careful Fed is fine in our view, because
inflation is not currently an issue and interest rates are providing good
support for stock prices.
Despite positive employment reports, renewed inflation fears and higher
interest rates, we think the fundamentals are in place to return the bond market
to year-end 1995 levels and to sustain the stock market. We see enough strength
in the economy -- and, in turn, corporate earnings -- to support stock market
growth, but not at the rate we have seen these past 15 months.
All in all, our outlook is positive; it's just unlikely that 1996 will
match 1995's bounty. It would be highly unrealistic to expect gains like those
we experienced last year.
The strength of the markets last year surprised prognosticators who'd
predicted a slowdown (if not a correction) and it highlighted the difficulty in
attempting to "time" the markets. Investors who took the conservative route
-2-
<PAGE> 5
and moved their money out of stocks and long-term bonds missed significant
gains.
Undeniably, the year-to-year behavior of the markets is unpredictable, and
can go either way. That is why investors with short-term time frames should use
short-term instruments such as money funds.
The money you have invested in stocks should be for long-term goals. And,
as you get closer to needing the funds you have invested toward a goal,
gradually reduce the percentage that is invested in stocks. Stocks are for money
that can be left invested for a long while.
Our commitment to our shareholders is as deeply ingrained as our long-term
attitude. At SAFECO Mutual Funds, we remain committed to providing you the
service, information and investment vehicles you need to achieve financial
security.
To that end, we introduced three new stock funds in January: The SAFECO
International, Balanced and Small Company Funds.
And in June, to better serve you, we'll bring a new automated information
system on-line. We are constantly striving for top-rated fund performance,
top-notch services and truly useful financial planning materials. Please call us
if we can be of further service at 1-800-426-6730. In the meantime, thank you
for investing with SAFECO Mutual Funds.
/s/ David F. Hill
David F. Hill, President
TABLE OF CONTENTS
<TABLE>
<S> <C>
SAFECO High-Yield Bond Fund......................4
SAFECO GNMA Fund................................12
SAFECO Intermediate-Term
U.S. Treasury Fund..............................16
Financial Statements............................18
Notes to Financial Statements...................21
</TABLE>
-3-
<PAGE> 6
================================================================================
REPORT FROM THE FUND MANAGER
SAFECO HIGH-YIELD BOND FUND
May 1, 1996
For the 12 months ended March 31, the SAFECO High-Yield Bond Fund had a
total return of 13.03%. The Fund underperformed 14.99%, the total return
reported by Lipper for the peer group. The Fund's bias toward higher-quality,
high-yield bonds tends to dampen its performance compared to other high-yield
funds. Over the six-month reporting period, lower-quality junk bonds
outperformed, by a wide margin, the higher-quality junk bonds favored by this
Fund.
While the Fund had a lower return, it also received the industry's highest
risk-adjusted rating. Among 438 fixed income funds, the SAFECO High-Yield Fund
earned a five-star rating from Morningstar* for the 5 years ending January 31,
1996.
Interest rates and bond prices were volatile over the past six months.
During the fourth quarter of 1995, interest rates declined significantly due to
low inflation and sluggish economic growth. As rates declined, bond prices
rallied. At the start of 1996, the outlook for bond prices was positive. Most
investors expected economic growth to remain weak, inflation to remain subdued
and interest rates to decline further.
[PHOTO]
KURT HAVNAER
As the first quarter progressed, however, newly-released economic data
pointed to a stronger-than-anticipated economy. Inflation fears increased and
hopes for interest rate cuts by the Federal Reserve dissipated. Interest rates
increased significantly and bond prices fell during February and March.
Despite the volatility, demand for high-yield bonds was strong. Individual
investors poured money into high-yield mutual funds and yield-hungry
institutional investors increased their exposure. The strong demand during the
six months boosted the Merrill Lynch High-Yield Index to a total return of
5.15%, surpassing the return on investment-grade corporate bonds,
mortgage-backed bonds and intermediate-term treasury notes.
-4-
<PAGE> 7
================================================================================
In anticipation of a weak economy and lower interest rates in 1996, the
Fund has concentrated on higher-rated junk bonds, issued by companies in
noncyclical industries for three reasons:
1. Default rates are increasing. In the past, higher-rated junk bonds have
outperformed lower-rated junk bonds as default rates increased.
2. In a weak economic environment, the earnings and cash flows of
higher-quality, noncyclical companies should deteriorate less rapidly than
lower-quality, cyclical companies.
3. The bond prices of higher-rated companies are more sensitive to changes
in interest rates than lower-rated companies. Higher-rated bond prices rise more
rapidly than lower-rated bond prices when interest rates decline.
I bought the bonds of three cable companies as cable television earnings
and cash flows are noncyclical. Additionally, they should benefit from
recently-passed deregulation legislation. I also purchased bonds of two large
(Continued on next page.)
SAFECO
HIGH-YIELD BOND FUND
S&P Credit Rating Distribution
as of March 31, 1996
[GRAPH]
<TABLE>
<S> <C>
B: 57.4%
BB: 35.4% [Pie chart appears here]
D: 1.2%
Not Rated: 0.7%
Cash and Other Assets,
Less Liabilities 5.3%
</TABLE>
SAFECO
HIGH-YIELD BOND FUND
Top Five Industries
As a Percent of Net Assets
as of March 31, 1996
<TABLE>
<S> <C>
Cable 5.8%
Home Building 5.2% [Bar chart appears here]
Containers/Packaging 5.2%
Oil & Gas 5.2%
Hospital Management 5.1%
</TABLE>
Current Yield (30-Day) .......8.68%
Weighted Average Maturity 7.63 years
-5-
<PAGE> 8
================================================================================
REPORT FROM THE
HIGH-YIELD BOND FUND MANAGER (Continued)
investor-owned hospital operators, as the demand for healthcare services is
stable throughout the economic cycle.
Despite the bond market's recent concerns over stronger-than-expected
economic growth, it is difficult to believe that the economy will rebound
sharply over the next year.
Consumer spending is unlikely to grow rapidly as income growth is weak.
Capital spending by businesses is expected to decline, and government spending
is not expected to increase significantly. The increase in interest rates during
the past two months, and tightening credit, should further dampen consumer
spending, business investment and housing activity.
As economic growth is expected to be moderate in Japan and weak, at best,
in Continental Europe, Canada and Mexico, exports are not expected to contribute
to economic growth.
For these reasons, barring a significant acceleration in economic growth,
the Fund will maintain its bias toward higher-quality, noncyclical companies.
These bonds should outperform in a weak economic environment. Additionally, I
will continue to diversify our higher-quality holdings by both issuer and
industry.
/s/ Kurt Havnaer
Kurt Havnaer,
High-Yield Bond Fund Manager
- --------------------
Kurt Havnaer joined SAFECO Asset Management in 1991 as a fixed-income securities
analyst. He became fund manager in January, 1995. Mr. Havnaer holds an M.B.A.
from Seattle University and a B.A. from the University of Washington. He is a
Certified Public Accountant as well as a Chartered Financial Analyst.
* Morningstar proprietary ratings reflect risk-adjusted performance and are
subject to change every month. Morningstar ratings are calculated from a fund's
3-year, 5-year and 10-year (if available) average annual return in excess of
90-day T-bill returns with appropriate fee adjustments and a risk factor that
reflects fund performance below 90-day T-bill returns. Ten percent of the funds
in an investment category receive five stars.
-6-
<PAGE> 9
================================================================================
HIGHLIGHTS
SAFECO HIGH-YIELD BOND FUND (Continued)
As of March 31, 1996
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS PERCENT OF NET ASSETS
- ------------------------------------------------
<S> <C>
Owens-Illinois, Inc.........................2.6%
(Containers/Packaging)
Century Communications Corp.................2.6%
(Cable Operator)
Quorum Health Group, Inc....................2.6%
(Hospital Management)
Mark IV Industries, Inc.....................2.4%
(Autos & Auto Parts)
Heritage Media Corp.........................2.4%
(Advertising)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(October through March) COST
- ------------------------------------------------
<S> <C>
Continental Cablevision...............$1,004,020
Quorum Health Group, Inc...............1,000,000
Mark IV Industries, Inc..................993,600
Heritage Media Corp......................983,750
AMF Group, Inc...........................750,000
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SALES
(October through March) Proceeds
- ------------------------------------------------
<S> <C>
Safeway, Inc..........................$1,135,500
Continental Cablevision................1,086,000
Young Broadcasting, Inc..................562,500
AMC Entertainment, Inc...................562,475
Comdata Network, Inc.....................558,075
</TABLE>
-7-
<PAGE> 10
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------
<S> <C>
CORPORATE BONDS - 94.7%
ADVERTISING - 2.4%
$1,000 Heritage Media Corp.
8.75%, due 2/15/06.............$ 968
AGRICULTURE/FERTILIZER PRODUCTS - 1.4%
500 Arcadian Partners, L.P.
10.75%, due 5/01/05...............542
AUTOS & AUTO PARTS - 3.7%
500 Exide Corp.
10.75%, due 12/15/02..............511
1,000 Mark IV Industries, Inc.
7.75%, due 4/01/06................968
BEVERAGE - 1.3%
500 Coca-Cola Bottling Group
(Southwest), Inc.
9.00%, due 11/15/03...............507
BROADCAST MEDIA - 2.5%
500 Sinclair Broadcast Group, Inc.
10.00%, due 9/30/05 ..............495
500 Young Broadcasting Corp.
9.00%, due 1/15/06 ...............475
CABLE - 5.8%
250 Cablevision Systems Corp.
10.75%, due 4/01/04 ..............263
1,000 Century Communications Corp.
9.50%, due 3/01/05 .............1,020
500 Jones Intercable, Inc.
11.50%, due 7/15/04...............550
500 Lenfest Communications, Inc.
8.375%, due 11/01/05 .............480
CHEMICALS - 2.5%
$ 500 Atlantis Group, Inc.
11.00%, due 2/15/03 ...........$ 454
500 UCC Investors Holding, Inc.
10.50%, due 5/01/02 ..............525
COMMERCIAL SERVICES - 1.3%
500 Primark Corp.
8.75%, due 10/15/00...............506
COMPUTER SOFTWARE - 1.6%
1,000 Bell & Howell Holdings Co.
0.00%/11.50%, due 3/01/05.........650
CONGLOMERATES - 1.3%
500 Figgie International, Inc.
9.875%, due 10/01/99 .............508
CONTAINERS/PACKAGING - 5.2%
500 Applied Extrusion Technologies, Inc.
11.50%, due 4/01/02 ..............515
1,000 Owens-Illinois, Inc.
9.75%, due 8/15/04..............1,021
500 Portola Packaging, Inc.
10.75%, due 10/01/05..............520
COSMETICS - 1.3% 500 Coty, Inc.
10.25%, due 5/01/05 ..............527
ELECTRONICS - 2.6%
500 IMO Industries, Inc.
12.00%, due 11/01/01..............511
500 Plantronics, Inc.
10.00%, due 1/15/01...............515
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-8-
<PAGE> 11
PORTFOLIO OF INVESTMENTS (continued)
SAFECO HIGH-YIELD BOND FUND
As of March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------
<S> <C>
ENTERTAINMENT - 3.3%
$500 ACT III Theatres
11.875%, due 2/01/03 .............$545
500 Alliance Entertainment Corp.
11.25%, due 7/15/05 ...............500
250 Cobb Theatres, L.L.C.
10.625%, due 3/01/03...............256
FINANCIAL - 2.6%
500 Scotsman Group, Inc.
9.50%, due 12/15/00 ...............499
500 Western Financial Savings Bank
8.50%, due 7/01/03 ................512
FOOD - 2.5%
500 Chiquita Brands International
11.50%, due 6/01/01 ...............524
500 Specialty Foods Corp.
11.125%, due 10/01/02..............467
GAMING - 3.8% 500 Aztar Corp.
11.00%, due 10/15/02 ..............504
500 Bally's Park Place Funding, Inc.
9.25%, due 3/15/04 ................502
500 Station Casinos, Inc.
9.625%, due 6/01/03 ...............498
HOME BUILDING - 5.2%
$ 500 Beazer Homes USA, Inc.
9.00%, due 3/01/04..............$ 481
500 Continental Homes Holding Corp.
12.00%, due 8/01/99 ...............545
300 K. Hovnanian Enterprises
11.25%, due 4/15/02................276
250 Toll Brothers, Inc.
10.50%, due 3/15/02 ...............261
500 Ryland Group
10.50%, due 7/15/02 ...............498
HOSPITAL MANAGEMENT - 5.1%
1,000 Quorum Health Group, Inc.
8.75%, due 11/01/05..............1,010
500 Tenet Healthcare Corp.
8.625%, due 12/01/03 ..............514
500 Universal Health Services, Inc.
8.75%, due 8/15/05 ................505
HOTELS/MOTELS - 3.7%
500 HMH Properties, Inc.
9.50%, due 5/15/05 ................485
500 John Q. Hammons Hotels
8.875%, due 2/15/04 ...............484
500 Prime Hospitality Corp.
9.25%, due 1/15/06.................485
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-9-
<PAGE> 12
PORTFOLIO OF INVESTMENTS (continued)
SAFECO HIGH-YIELD BOND FUND
As of March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------
<S> <C>
HOUSEHOLD PRODUCTS - 1.3%
$500 Ekco Group, Inc.
9.25%, due 4/01/06..............$505
INSURANCE - 1.3%
500 American Financial
9.75%, due 4/20/04 ..............525
LEISURE TIME - 1.9%
750 AMF Group, Inc.
10.875%, due 3/15/06.............747
MACHINERY - 0.8%
500 International Semi-Tech
Microelectronics, Inc.
0.00%/11.50%, due 8/15/03....... 297
MANUFACTURING - 1.2%
500 Plastic Specialties and
Technologies, Inc.
11.25%, due 12/01/03 ............482
MISCELLANEOUS - 3.5%
500 ADT Operations, Inc.
9.25%, due 8/01/03 ..............522
365 Foamex, L.P.
9.50%, due 6/01/00 ..............354
500 International Shipholding Corp.
9.00%, due 7/01/03 ..............495
OFFICE EQUIPMENT & SUPPLIES - 0.7%
268 ANACOMP, Inc.
12.25%, due 10/26/97 ............269
OIL & GAS - 5.2%
$500 Crown Central Petroleum Corp.
10.875%, due 2/01/05 ...........$513
500 Giant Industries, Inc.
9.75%, due 11/15/03 .............505
500 Mesa Capital Corp.
0.00%/12.75%, due 6/30/98........490
500 Nuevo Energy Co.
12.50%, due 6/15/02 .............536
PAPER & FOREST PRODUCTS - 1.3%
500 Stone Container Corp.
11.875%, due 12/01/98 ...........519
PUBLISHING - 1.2%
500 K-III Communications Corp.
8.50%, due 2/01/06...............483
RESTAURANTS - 1.1%
500 Flagstar Cos., Inc.
10.75%, due 9/15/01 .............454
RETAIL - DEPARTMENT STORES - 2.1%
500 K-Mart Corp.
7.95%, due 2/01/23 ..............390
500 Parisian, Inc.
9.875%, due 7/15/03 .............450
RETAIL - GROCERS - 1.8%
398 Grand Union Co.
12.00%, due 9/01/04 .............348
500 Southland Corp.
4.50%, due 6/15/04 ..............374
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-10-
<PAGE> 13
PORTFOLIO OF INVESTMENTS (continued)
SAFECO HIGH-YIELD BOND FUND
As of March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT (000's) VALUE (000's)
- --------------------------------------------------
<S> <C>
RETAIL - OTHER - 1.6%
Petroleum Heat & Power Co.
$325 12.25%, due 2/01/05 .........$ 366
250 9.375%, due 2/01/06 .............249
STEEL - 2.8%
500 Armco, Inc.
9.375%, due 11/01/00 ............503
600 Weirton Steel Corp.
10.875%, due 10/15/99 ...........612
TEXTILES - 1.9%
250 Dominion Textile (USA), Inc.
9.25%, due 4/01/06...............251
500 Fieldcrest Mills, Inc.
11.25%, due 6/15/04 .............490
TRANSPORTATION - 1.3%
472 Delta Air Lines, Inc.
9.875%, due 4/30/08 .............532
UTILITIES - 4.6%
$ 500 El Paso Electric Co.
9.40%, due 5/01/11...........$ 506
425 Beaver Valley Funding Corp.
8.625%, due 6/01/07 .............381
500 First PV Funding
10.15%, due 1/15/16 .............525
386 Midland Cogeneration
Venture, L. P.
10.33%, due 7/23/02 .............405
-------
TOTAL CORPORATE BONDS.....................37,460
-------
TEMPORARY INVESTMENTS - 3.7%
INVESTMENT COMPANIES:
1,469 Short-Term Investments Co.
(Prime Portfolio) .............1,469
-------
TOTAL TEMPORARY INVESTMENTS................1,469
-------
TOTAL INVESTMENTS - 98.4%.................38,929
Other Assets, less Liabilities ..............639
-------
NET ASSETS ..............................$39,568
-------
- -----------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-11-
<PAGE> 14
REPORT FROM THE FUND MANAGER
SAFECO GNMA FUND
May 1, 1996
For the 12 months ended March 31, 1996, the SAFECO GNMA Fund returned
8.79%, while the average GNMA fund returned 9.63% according to Lipper Analytical
Services.
A complete reversal characterized the bond market over the six months just
ended. The first three months of the period blessed fixed-income investors
across all bond types and maturities with generous price gains and stunning
total returns. The second three months reversed these gains, and then some.
The only clear way to have beaten the market would have been to have the
uncanny foresight to predict the whip-saw -- investing to maximize gains in the
last quarter of 1995 as the market rallied, and then turning dramatically
conservative in February as the market started to fall.
We began the six months ended March 31, positioned to generate good income
and to participate in a rally. We were fully invested in 30-year pass-throughs,
with little cash, no big premiums, and few middle coupons. Our duration
(sensitivity to interest rate changes) was slightly higher, and our average
coupon slightly lower, than the Merrill Lynch GNMA Index. Unfortunately,
interest rates did an about-face in February. The resulting net rise in rates
caused longer-duration, lower-coupon portfolios such as ours to suffer most.
Thus, we underperformed our peer group average.
[PHOTO]
PAUL STEVENSON
The reporting period began in the last quarter of '95 with a bullishness
that seemed shared by all. Investors were investing as if the rally would
continue. Economists, generally, were arguing for lower rates, given the
environment of benign inflation and tame economic growth. And the Fed was being
accommodative.
-12-
<PAGE> 15
With hindsight, we can see bond prices were ahead of themselves on
anticipation that the Federal Reserve would lower rates further, and on an
imbalance of supply and demand. (Foreign buyers and international hedge funds
were investing heavily in U.S. bonds to pick up substantial yield gains.)
This party ended early in the first quarter of 1996 with the pickup in the
Japanese economy and the subsequent drop in the U.S. dollar. Next, testifying
before Congress, Fed Chairman Alan Greenspan dampened hopes for further rate
cuts. Finally, on March 8th, the government released shockingly strong
employment news. The long U.S. Treasury Bond fell more than 3% that day. The
great gains logged in the preceding quarter were erased.
Fortunately for mortgage investors, mortgage-backed securities outperformed
both corporate and U.S. Treasury securities as they typically do when rates are
rising. The yield premium that mortgage-backs pay to compensate for the risk of
their being called when rates are falling also cushions their prices when rates
are rising.
Given the current uncertainties of the market, I added intermediate-term
U.S. Treasuries (which are not callable) to improve the potential price
performance of the Fund if rates do rally. I also traded out of a block of GNMA
7%s into GNMA 7.5%s, which shortened the fund's duration and added yield. A
higher yield and shorter maturity should help insulate the fund if rates
continue to rise.
Going forward, I will continue with the Fund's emphasis on
30-year GNMA pass-throughs, maintain a duration fairly close to the index, hold
some intermediate U.S. Treasuries, and keep cash to a minimum.
On March 31, the Fund's weighted average coupon was 7.5% versus 8% for the
Merrill Lynch
(Continued on next page.)
-13-
<PAGE> 16
HIGHLIGHTS
As of March 31, 1996 (Unaudited)
SAFECO GNMA FUND
CURRENT 30-DAY YIELD
FOR THE SIX MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
GNMA FUND
DATE SEC YIELD
<S> <C>
10/31/95 6.38
11/30/95 6.56
12/29/95 6.34
01/31/96 6.38
02/29/96 6.40
03/29/96 6.39
</TABLE>
This graph depicts the average 30-day current yield at month-end for the SAFECO
GNMA Fund.
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
CURRENT 30-DAY YIELD
FOR THE SIX MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
DATE SEC YIELD
<S> <C>
10/31/95 5.17
11/30/95 5.04
12/29/95 4.80
01/31/96 4.64
02/29/96 4.68
03/29/96 4.47
</TABLE>
This graph depicts the average 30-day current yield at month-end for the SAFECO
Intermediate-Term U.S. Treasury Fund.
These graphs represent historical data and are not predictive of future yields.
REPORT FROM THE
GNMA FUND MANAGER (Continued)
GNMA Index, while the Fund's duration at 4.5 years was slightly short of the
index at 4.8 years.
Despite rising rates, mixed economic releases, and increased polarity in
economists' outlook, I am still positive on interest rates. While I am
optimistic, I am also vigilant and ready to further shorten the Fund's duration
should economic conditions deteriorate. I will move among the various sectors of
the mortgage markets, adjusting the Fund's interest rate sensitivity, in order
to protect the value of your principal when rates rise and to participate in the
capital gains created when rates fall.
/s/ Paul Stevenson
Paul Stevenson,
GNMA Fund Manager
Paul Stevenson joined SAFECO in 1986 as mortgage securities analyst. He became
GNMA Fund manager in 1988. Stevenson has a Bachelor of Arts in finance from
Washington State University and is a Chartered Financial Analyst.
-14-
<PAGE> 17
PORTFOLIO OF INVESTMENTS
SAFECO GNMA FUND
As of March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT AND
AGENCY SECURITIES - 97.8%
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA) - 9.2%
$ 4,164 6.50%, due 10/01/23 ................... $ 3,953
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA) - 84.1%
2,860 9.50%, due 4/15/16 - 3/15/20 .......... 3,102
956 9.00%, due 8/15/11 - 9/15/11 .......... 996
4,522 8.50%, due 7/20/21 - 5/20/22 .......... 4,685
4,708 8.00%, due 6/15/21 - 12/15/22 ......... 4,822
14,461 7.50%, due 1/15/22 - 4/20/23 .......... 14,408
6,119 7.00%, due 4/15/23 - 12/15/23 ......... 5,963
2,420 6.50%, due 10/15/23 - 4/15/24 ......... 2,291
U.S. TREASURY NOTES - 4.5%
$ 750 5.75%, due 10/31/00 ................... 740
1,250 5.75%, due 8/15/03 .................... 1,206
-------
TOTAL U.S. GOVERNMENT
AND AGENCY SECURITIES ........................................ 42,166
-------
TEMPORARY INVESTMENTS - 3.5%
INVESTMENT COMPANIES:
1,487 Short-Term Investments Co.
(Prime Portfolio) ..................... 1,487
-------
TOTAL TEMPORARY INVESTMENTS .................................. 1,487
-------
TOTAL INVESTMENTS - 101.3% ................................... 43,653
Liabilities, less Other Assets ............................... (550)
-------
NET ASSETS ................................................... $43,103
=======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-15-
<PAGE> 18
REPORT FROM THE FUND MANAGER
SAFECO INTERMEDIATE-TERM
U.S. TREASURY FUND
May 1, 1996
With a total return of 9.58% for the 12 months ending March 31, the SAFECO
Intermediate-Term U.S. Treasury Fund beat both its benchmark index and its peer
group. The Merrill Lynch Intermediate-Term Treasury Index performance and the
Lipper average total return for similar funds were both 9.18%.
Having a fairly long average maturity (though still within the
intermediate-term range of three to ten years) as interest rates continued their
march downward in the last quarter of 1995 served the Fund well. So did
shortening the average maturity (which lessened the fund's sensitivity to
interest rate changes) when rates reversed direction in the first quarter of
1996.
While bond returns for the year 1995 were among the best ever, so far in
1996 the bond market has had a hard time accepting the economy's prosperity. In
fact, the bond market's reaction to signs of economic strength has been harsh.
Concerns over rising employment, a rebound in both manufacturing activity and
retail sales, and disappointment over the failure to reach a federal budget deal
have pushed bond yields up sharply. As a result, bond returns in the first
quarter of 1996 were negative.
[PHOTO OF MICHAEL C. KNEBEL]
Managing the Fund, we use a trend-following style, as opposed to the more
risky interest-rate anticipation style. Rather than try to anticipate which path
interest rates are likely to take, we respond to changes in rates by adjusting
the Fund's average maturity.
We shorten average maturity to lower sensitivity and protect the value of
your principal when interest rates rise. And, we lengthen maturity to
participate in the capital gains created when rates fall. In this way we work to
minimize risk and boost returns.
Since January we have reduced the average maturity of the Fund, from six to
about three years. At its current level, the
-16-
<PAGE> 19
Fund's maturity is shorter than the market averages, which should help insulate
the Fund if rates increase further.
While we think the market has overreacted to recent economic news, a
stronger economy in an election year is not unprecedented, and any acceleration
in GDP growth beyond a 2 1/2% annual rate will likely put upward pressure on
rates. Nonetheless, we continue to believe that growth will be moderate and
inflation will remain well controlled. That leaves room for rates to eventually
retrace their steps in the coming months. Should we see rates turn downward
again, we will adjust the fund's average maturity to take advantage of the
trend.
/s/ Michael Knebel
- ------------------
Michael Knebel,
Intermediate-Term
U.S. Treasury Fund Manager
- ----------
Mike Knebel has managed bond portfolios for SAFECO since 1989. Before that he
managed municipal bond and money market funds for Lutheran Brotherhood. He
earned his M.B.A. in Finance at the University of Minnesota, and he is a
Chartered Financial Analyst.
PORTFOLIO OF INVESTMENTS
SAFECO
INTERMEDIATE-TERM
U.S. TREASURY FUND
As of March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
U.S. TREASURY NOTES - 97.5%
U.S. TREASURY NOTES - 97.5%
$ 350 8.50%, due 4/15/97 $ 360
1,925 7.75%, due 2/15/01 2,057
800 7.50%, due 11/15/01 849
825 7.50%, due 2/15/05 885
2,225 6.25%, due 2/15/03 2,217
6,850 6.00%, due 6/30/96 6,861
670 6.00%, due 10/15/99 670
-------
TOTAL U.S. TREASURY NOTES 13,899
-------
TEMPORARY INVESTMENTS - 1.8%
260 Short-Term Investments Co.
(Prime Portfolio) 260
-------
TOTAL TEMPORARY INVESTMENTS 260
-------
TOTAL INVESTMENTS - 99.3% 14,159
Other Assets, less Liabilities 96
-------
NET ASSETS $14,255
=======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-17-
<PAGE> 20
STATEMENTS OF ASSETS AND LIABILITIES
As of March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
SAFECO SAFECO
HIGH-YIELD SAFECO INTERMEDIATE-TERM
(In Thousands, Except Per-Share Amounts) BOND FUND GNMA FUND U.S. TREASURY FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments, at Value:
U.S. Government and Agency Obligations
(Identified Cost $41,702 and
$13,909, respectively) -- $42,166 $13,899
Corporate Bonds
(Identified Cost $36,908) $37,460 -- --
Temporary Investments 1,469 1,487 260
------- ------- -------
Total Investments 38,929 43,653 14,159
Receivables
Investment Securities Sold 535 4,552 --
Interest 961 266 199
Trust Shares Sold 30 24 3
------- ------- -------
Total Assets 40,455 48,495 14,361
------- ------- -------
LIABILITIES
Payables
Investment Securities Purchased 739 5,286 --
Trust Shares Redeemed 7 5 60
Dividends 105 62 30
Investment Advisory Fees 20 22 6
Other 16 17 10
------- ------- -------
Total Liabilities 887 5,392 106
------- ------- -------
NET ASSETS $39,568 $43,103 $14,255
======= ======= =======
SHARES OUTSTANDING 4,545 4,619 1,398
======= ======= =======
NET ASSET VALUE PER SHARE $ 8.70 $ 9.33 $ 10.20
======= ======= =======
(Net Assets Divided by Shares Outstanding)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-18-
<PAGE> 21
STATEMENTS OF OPERATIONS
For the Six Months Ended March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
SAFECO SAFECO
HIGH-YIELD SAFECO INTERMEDIATE-TERM
(In Thousands) BOND FUND GNMA FUND U.S. TREASURY FUND
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Interest $ 2,039 $ 1,611 $ 421
EXPENSES
Investment Advisory Fees 128 140 39
Shareholder Servicing Costs 49 62 22
Legal and Auditing Fees 7 7 7
Custodian Fees 6 11 3
Reports to Shareholders 8 11 3
Directors' Fees 2 2 2
Loan Interest Expense 1 1 --
------- ------- -----
Total Expenses 201 234 76
------- ------- -----
NET INVESTMENT INCOME 1,838 1,377 345
------- ------- -----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net Realized Gain on Investments 125 1 304
Net Change in Unrealized (Depreciation) (38) (525) (366)
------- ------- -----
NET GAIN (LOSS) ON INVESTMENTS 87 (524) (62)
------- ------- -----
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,925 $ 853 $ 283
======= ======= =====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-19-
<PAGE> 22
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
<TABLE>
<CAPTION>
SAFECO SAFECO
HIGH-YIELD SAFECO INTERMEDIATE-TERM
BOND FUND GNMA FUND U.S. TREASURY FUND
--------------------------- ------------------------- ----------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
SIX MONTHS YEAR SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31 SEPT. 30 MARCH 31 SEPT. 30 MARCH 31 SEPT. 30
(In Thousands) 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income $ 1,838 $ 2,996 $ 1,377 $ 2,847 $ 345 $ 720
Net Realized Gain (Loss) on
Investments 125 (579) 1 (1,292) 304 7
Net Change in Unrealized
Appreciation (Depreciation) (38) 1,459 (525) 3,055 (366) 638
-------- -------- ------- -------- ------- -------
Net Change in Net Assets
Resulting from Operations 1,925 3,876 853 4,610 283 1,365
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income (1,838) (2,996) (1,377) (2,847) (345) (720)
TRUST SHARE TRANSACTIONS 303 11,086 (428) (3,884) 543 (238)
-------- -------- ------- -------- ------- -------
TOTAL CHANGE IN NET ASSETS 390 11,966 (952) (2,121) 481 407
NET ASSETS AT BEGINNING OF PERIOD 39,178 27,212 44,055 46,176 13,774 13,367
-------- -------- ------- -------- ------- -------
NET ASSETS AT END OF PERIOD $ 39,568 $ 39,178 $43,103 $ 44,055 $14,255 $13,774
======== ======== ======= ======== ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
OTHER INFORMATION
INCREASE (DECREASE) IN TRUST SHARES AND AMOUNTS
<S> <C> <C> <C> <C> <C> <C>
SHARES
Sales 3,536 7,306 478 927 239 431
Reinvestments 125 190 100 215 16 37
Redemptions (3,627) (6,168) (623) (1,582) (203) (495)
-------- -------- ------- -------- ------- -------
Net Change 34 1,328 (45) (440) 52 (27)
======== ======== ======= ======== ======= =======
AMOUNTS
Sales $ 30,906 $ 62,148 $ 4,531 $ 8,523 $ 2,498 $ 4,265
Reinvestments 1,087 1,464 950 1,976 167 374
Redemptions (31,690) (52,526) (5,909) (14,383) (2,122) (4,877)
-------- -------- ------- -------- ------- -------
Net Change $ 303 $ 11,086 $ (428) $ (3,884) $ 543 $ (238)
======== ======== ======= ======== ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-20-
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
SAFECO High-Yield Bond Fund, SAFECO GNMA Fund, and SAFECO Intermediate-Term
U.S. Treasury Fund (together "the Funds") are registered under the Investment
Company Act of 1940, as amended, as diversified, open-end management investment
companies. 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 permits management to make certain estimates and assumptions
at the date of the financial statements.
SECURITY VALUATION. Investment securities are stated on the basis of
valuations provided by a pricing service, which uses information with respect to
transactions in securities, quotations from securities dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Temporary investments purchased at par are
valued at cost. All other temporary investments are valued at amortized cost.
SECURITY TRANSACTIONS. Security transactions are recorded on the trade
date. The cost of the portfolio 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 Fund establishes a segregated asset account equal
to the total obligation.
INCOME RECOGNITION. Interest is accrued on portfolio investments daily. The
Funds have not elected to amortize premium on
(Continued on next page.)
-21-
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
securities purchased above par value.
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, are normally distributed to
shareholders at the end of September and December.
FEDERAL INCOME AND EXCISE TAXES. The Funds intend to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies by distributing substantially all taxable income to their shareholders
in a manner which results in no tax to the Funds. Therefore, no federal income
or excise tax provision is required.
2. TRUST SHARE INFORMATION
As of March 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO
HIGH-YIELD SAFECO INTERMEDIATE-TERM
BOND FUND GNMA FUND U.S. TREASURY FUND
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Shares Authorized Unlimited Unlimited Unlimited
Par Value Per Share $ .001 $ .001 $ .001
Paid in Capital $ 40,262 $ 46,278 $ 14,322
- --------------------------------------------------------------------------------
</TABLE>
-22-
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. ACCUMULATED REALIZED LOSS
The Funds had the following amounts of accumulated net realized loss on
investment transactions at March 31, 1996.
<TABLE>
<CAPTION>
(In Thousands) AMOUNTS
- --------------------------------------------------------------------------------
<S> <C>
SAFECO High-Yield Bond Fund $(1,246)
SAFECO GNMA Fund (3,639)
SAFECO Intermediate-Term U.S. Treasury Fund (57)
- --------------------------------------------------------------------------------
</TABLE>
4. INVESTMENT TRANSACTIONS
<TABLE>
<CAPTION>
SAFECO SAFECO
HIGH-YIELD SAFECO INTERMEDIATE-TERM
(In Thousands) BOND FUND GNMA FUND U.S. TREASURY FUND
<S> <C> <C> <C>
PURCHASES FOR THE SIX MONTHS ENDED MARCH 31, 1996
(including $0, $11,370, and $16,323,
respectively, of U.S. Government obligations) $12,625 $11,370 $16,323
======= ======= =======
SALES FOR THE SIX MONTHS ENDED MARCH 31, 1996
(including $0, $12,388, and $16,071,
respectively, of U.S. Government obligations) $10,701 $12,388 $16,071
======= ======= =======
UNREALIZED APPRECIATION (DEPRECIATION)
AT MARCH 31, 1996
Aggregate gross unrealized appreciation
for investment securities in which there
is an excess of value over identified cost $ 682 $ 749 $ 74
Aggregate gross unrealized depreciation
for investment securities in which there
is an excess of identified cost over value (130) (285) (84)
------- ------- -------
NET UNREALIZED APPRECIATION (DEPRECIATION) $ 552 $ 464 $ (10)
======= ======= =======
</TABLE>
-23-
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
SAFECO Asset Management Company receives investment advisory fees from the
Funds. For the SAFECO High-Yield Bond Fund and the SAFECO GNMA Fund the fee is
based on average daily net assets at the annual rate of 65/100 of one percent on
the first $250 million declining in three levels to 35/100 of one percent on net
assets over $750 million. For the SAFECO Intermediate-Term U.S. Treasury Fund
the fee is based on average daily net assets at the annual rate of 55/100 of one
percent on the first $250 million declining in three levels to 25/100 of one
percent on net assets over $750 million. SAFECO Services Corporation receives
shareholder servicing fees. At March 31, 1996, SAFECO Corporation owned 500,000
shares (or 11.0% of the outstanding shares) of the SAFECO High-Yield Bond Fund
and SAFECO Insurance Company of America owned 500,000 shares (or 35.8% of the
outstanding shares) of the SAFECO Intermediate-Term U.S. Treasury Fund. The
Funds may borrow money for temporary purposes from SAFECO Corporation or its
affiliates at interest rates equivalent to commerical bank interest rates.
-24-
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
MARCH 31 FOR THE YEAR ENDED SEPTEMBER 30
------------ -------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 8.68 $ 8.55 $ 9.22 $ 8.92 $ 8.35 $ 7.94
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.39 0.79 0.82 0.91 0.83 0.93
Net Realized and Unrealized
Gain (Loss) on Investments 0.02 0.13 (0.67) 0.30 0.57 0.41
------- ------- ------- ------- ------- -------
Total from Investment Operations 0.41 0.92 0.15 1.21 1.40 1.34
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.39) (0.79) (0.82) (0.91) (0.83) (0.93)
------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 8.70 $ 8.68 $ 8.55 $ 9.22 $ 8.92 $ 8.35
======= ======= ======= ======= ======= =======
TOTAL RETURN 4.82%+ 11.43% 1.61% 14.29% 17.52% 18.18%
NET ASSETS AT END OF PERIOD (000'S) $39,568 $39,178 $27,212 $28,291 $19,672 $11,931
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.99%* 1.01% 1.03% 1.09% 1.05% 1.11%
RATIO OF NET INCOME TO
AVERAGE NET ASSETS 9.08%* 9.28% 9.26% 9.94% 9.66% 11.51%
PORTFOLIO TURNOVER RATE 55.18%* 38.03% 63.02% 50.27% 40.66% 32.46%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Not Annualized
* Annualized
-25-
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO GNMA FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
MARCH 31 FOR THE YEAR ENDED SEPTEMBER 30
------------ ------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 9.45 $ 9.05 $ 10.03 $ 9.95 $ 9.68 $ 9.16
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.30 0.60 0.60 0.67 0.73 0.78
Net Realized and Unrealized
Gain (Loss) on Investments (0.12) 0.40 (0.98) 0.08 0.27 0.52
------- ------- ------- ------- ------- -------
Total from Investment Operations 0.18 1.00 (0.38) 0.75 1.00 1.30
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.30) (0.60) (0.60) (0.67) (0.73) (0.78)
------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 9.33 $ 9.45 $ 9.05 $ 10.03 $ 9.95 $ 9.68
======= ======= ======= ======= ======= =======
TOTAL RETURN 1.88%+ 11.49% -3.91% 7.81% 10.75% 14.72%
NET ASSETS AT END OF PERIOD (000'S) $43,103 $44,055 $46,176 $62,720 $56,474 $42,207
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.07%* 1.01% 0.95% 0.93% 0.94% 0.97%
RATIO OF NET INCOME TO
AVERAGE NET ASSETS 6.29%* 6.55% 6.26% 6.71% 7.49% 8.23%
PORTFOLIO TURNOVER RATE 52.85%* 131.24% 55.12% 70.96% 24.66% 43.80%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Not Annualized
* Annualized
-26-
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. FINANCIAL HIGHLIGHTS (Continued)
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
MARCH 31 FOR THE YEAR ENDED SEPTEMBER 30
------------ ------------------------------------------------------------
1996 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.24 $ 9.74 $ 10.74 $ 10.69 $ 10.20 $ 9.83
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.25 0.55 0.52 0.60 0.72 0.75
Net Realized and Unrealized
Gain (Loss) on Investments (0.04) 0.50 (1.00) 0.49 0.54 0.37
-------- -------- ------- -------- ------- ------
Total from Investment Operations 0.21 1.05 (0.48) 1.09 1.26 1.12
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.25) (0.55) (0.52) (0.60) (0.72) (0.75)
Distributions from
Capital Gains -- -- -- (0.44) (0.05) --
-------- -------- ------- -------- ------- ------
Total Distributions (0.25) (0.55) (0.52) (1.04) (0.77) (0.75)
-------- -------- ------- -------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 10.20 $ 10.24 $ 9.74 $ 10.74 $ 10.69 $10.20
======== ======== ======= ======== ======= ======
TOTAL RETURN 2.03%+ 11.07% -4.56% 10.51% 12.78% 11.80%
NET ASSETS AT END OF PERIOD (000'S) $ 14,255 $ 13,774 $13,367 $ 14,706 $12,205 $9,458
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.06%* 0.96% 0.90% 0.99% 0.98% 100%
RATIO OF NET INCOME TO
AVERAGE NET ASSETS 4.83%* 5.51% 5.08% 5.52% 6.89% 7.45%
PORTFOLIO TURNOVER RATE 228.20%* 124.90% 75.46% 104.94% 37.19% 9.51%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Not Annualized
* Annualized
-27-
<PAGE> 30
This page left blank intentionally.
-28-
<PAGE> 31
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
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
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.
-29-
<PAGE> 32
SAFECO TAXABLE BOND FUNDS
BOARD OF TRUSTEES:
Boh A. Dickey, Chairman
Barbara J. Dingfield
Richard W. Hubbard
Richard E. Lundgren
L.D. McClean
Larry L. Pinnt
John W. Schneider
OFFICERS:
David F. Hill, President
Ronald L. Spaulding
Vice President and Treasurer
Neal A. Fuller
Vice President and Controller
INVESTMENT ADVISER:
SAFECO Asset
Management Company
DISTRIBUTOR:
SAFECO Securities, Inc.
TRANSFER AGENT:
SAFECO Services Corporation
CUSTODIAN:
U.S. Bank of Washington, N.A.
FOR SHAREHOLDER SERVICE:
Monday-Friday,
5:30am-7:00pm Pacific Time
NATIONWIDE: 1-800-624-5711
SEATTLE: 545-7319
TTY/TDD: 1-800-438-8718
FOR YIELDS, PRICES AND
PERFORMANCE INFORMATION:
24 hours a day, 7 days a week
NATIONWIDE: 1-800-835-4391
SEATTLE: 545-5113
MAILING ADDRESS:
SAFECO Mutual Funds
P.O. Box 34890
Seattle, WA 98124-1890
GMF 660 5/96
[RECYCLE LOGO] Printed on Recycled Paper.
This report must be preceded or accompanied by a current prospectus.
(R) Registered trademark of SAFECO Corporation.
