<PAGE> 1
December 31, 1996
Mt. Rainier, Washington
[GRAPHIC IMAGE OF MT. RAINIER, WASHINGTON]
ANNUAL
REPORT
[LEAF GRAPHIC]
[GRAPHIC IMAGE OF A LEAF]
SAFECO High-Yield Bond Fund
SAFECO GNMA Fund
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO Managed Bond Fund
[SAFECO MUTUAL FUNDS LOGO]
<PAGE> 2
PERFORMANCE INFORMATION
December 31, 1996
NO-LOAD CLASS
SAFECO HIGH-YIELD BOND FUND*
ILLUSTRATION OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
INVESTMENT
VALUE AS OF
DEC.31, 1996
SAFECO
HIGH-YIELD
BOND FUND:
$20,778*
=============
MERRILL LYNCH
HIGH-YIELD
INDEX:
$25,269
=============
High-Yield Bond Fund
<TABLE>
<CAPTION>
Merrill
HY Index
<S> <C> <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
04/30/96 19,219 23,097
05/31/96 19,339 23,264
06/30/96 19,388 23,368
07/31/96 19,591 23,510
08/31/96 19,869 23,802
09/30/96 20,271 24,356
10/31/96 20,349 24,567
11/30/96 20,651 25,061
12/31/96 20,778 25,269
</TABLE>
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>
- --------------------------------------------------------------------------------
10 YEAR OR
AVERAGE ANNUAL SINCE
TOTAL RETURN 1 YEAR 5 YEAR INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SAFECO High-Yield Bond Fund* 10.39% 10.68% 9.27%
Merrill Lynch High-Yield Index 11.27% 12.70% 11.89%
- --------------------------------------------------------------------------------
SAFECO GNMA Fund 3.98% 5.60% 7.25%
Merrill Lynch GNMA Index 5.58% 7.08% 9.17%
- --------------------------------------------------------------------------------
SAFECO Intermediate-Term U.S. Treasury Fund* 0.38% 5.94% 7.40%
Merrill Lynch Intermediate-Term Treasury Index 3.89% 6.25% 8.18%
- --------------------------------------------------------------------------------
SAFECO Managed Bond Fund** 0.02% N/A 4.68%
Lehman Brothers Government/Corporate Index 2.90% N/A 6.41%
- --------------------------------------------------------------------------------
</TABLE>
* The Fund's inception was September 7, 1988. Index graph and average annual
return comparison begins September 30, 1988.
** The Fund's inception was June 25, 1992. Index graph and average annual return
comparison begins February 28, 1994 (initial public offering).
<PAGE> 3
SAFECO GNMA FUND
ILLUSTRATION OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
INVESTMENT
VALUE AS OF
DEC. 31, 1996
SAFECO
GNMA
FUND:
$20,134
==============
MERRILL LYNCH
GNMA INDEX:
$24,037
==============
<TABLE>
<CAPTION>
Merrill
GNMA Index
<S> <C> <C>
12/31/86 10,000 10,000
01/31/87 10,107 10,132
02/28/87 10,197 10,229
03/31/87 10,185 10,233
04/30/87 9,783 9,913
05/31/87 9,763 9,878
06/30/87 9,919 10,054
07/31/87 9,978 10,081
08/31/87 9,976 10,029
09/30/87 9,777 9,737
10/31/87 9,894 10,102
11/30/87 10,003 10,230
12/31/87 10,089 10,335
01/31/88 10,285 10,791
02/28/88 10,371 10,917
03/31/88 10,339 10,814
04/30/88 10,362 10,741
05/31/88 10,278 10,702
06/30/88 10,487 11,007
07/31/88 10,476 10,965
08/31/88 10,487 10,972
09/30/88 10,662 11,246
10/31/88 10,947 11,519
11/30/88 10,888 11,343
12/31/88 10,877 11,291
01/31/89 10,991 11,486
02/28/89 10,959 11,405
03/31/89 10,969 11,409
04/30/89 11,151 11,627
05/31/89 11,433 11,986
06/30/89 11,711 12,358
07/31/89 11,967 12,577
08/31/89 11,808 12,422
09/30/89 11,862 12,476
10/31/89 12,076 12,794
11/30/89 12,208 12,947
12/31/89 12,283 13,024
01/31/90 12,146 12,887
02/28/90 12,202 13,003
03/31/90 12,217 13,020
04/30/90 12,049 12,897
05/31/90 12,418 13,307
06/30/90 12,584 13,526
07/31/90 12,815 13,755
08/31/90 12,700 13,865
09/30/90 12,784 13,991
10/31/90 12,893 14,162
11/30/90 13,178 14,477
12/31/90 13,353 14,717
01/31/91 13,542 14,928
02/28/91 13,620 15,033
03/31/91 13,691 15,147
04/30/91 13,840 15,298
05/31/91 13,950 15,421
06/30/91 13,966 15,443
07/31/91 14,188 15,702
08/31/91 14,415 15,998
09/30/91 14,666 16,287
10/31/91 14,882 16,544
11/30/91 14,957 16,657
12/31/91 15,330 17,070
01/31/92 15,116 16,863
02/28/92 15,240 17,030
03/31/92 15,152 16,923
04/30/92 15,264 17,103
05/31/92 15,560 17,419
06/30/92 15,725 17,691
07/31/92 15,949 17,795
08/31/92 16,112 18,056
09/30/92 16,243 18,190
10/31/92 16,075 18,051
11/30/92 16,144 18,143
12/31/92 16,357 18,366
01/31/93 16,598 18,608
02/28/93 16,779 18,780
03/31/93 16,847 18,896
04/30/93 16,905 19,000
05/31/93 16,954 19,100
06/30/93 17,240 19,281
07/31/93 17,311 19,373
08/31/93 17,493 19,411
09/30/93 17,512 19,421
10/31/93 17,541 19,480
11/30/93 17,374 19,487
12/31/93 17,515 19,680
01/31/94 17,710 19,835
02/28/94 17,441 19,742
03/31/94 16,888 19,229
04/30/94 16,741 19,087
05/31/94 16,798 19,127
06/30/94 16,723 19,086
07/31/94 17,045 19,463
08/31/94 17,084 19,516
09/30/94 16,827 19,297
10/31/94 16,783 19,284
11/30/94 16,638 19,235
12/31/94 16,766 19,440
01/31/95 17,110 19,861
02/28/95 17,511 20,392
03/31/95 17,569 20,492
04/30/95 17,795 20,783
05/31/95 18,285 21,404
06/30/95 18,362 21,544
07/31/95 18,384 21,598
08/31/95 18,583 21,828
09/30/95 18,761 22,055
10/31/95 18,906 22,239
11/30/95 19,128 22,480
12/31/95 19,362 22,767
01/31/96 19,490 22,942
02/28/96 19,227 22,760
03/31/96 19,114 22,730
04/30/96 19,037 22,656
05/31/96 18,995 22,571
06/30/96 19,256 22,827
07/31/96 19,285 22,929
08/31/96 19,282 22,961
09/30/96 19,602 23,331
10/31/96 19,963 23,800
11/30/96 20,259 24,163
12/31/96 20,134 24,037
</TABLE>
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND*
ILLUSTRATION OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
INVESTMENT
VALUE AS OF
DEC. 31, 1996
SAFECO
INTERMEDIATE-
TERM U.S.
TREASURY FUND:
$18,025*
==============
MERRILL LYNCH
INTERMEDIATE-
TERM TREASURY
INDEX: $19,135
==============
<TABLE>
<CAPTION>
Int Treas Merrill
<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
04/30/96 17,355 18,222
05/31/96 17,351 18,212
06/30/96 17,477 18,390
07/31/96 17,532 18,447
08/31/96 17,530 18,467
09/30/96 17,726 18,701
10/31/96 17,945 19,006
11/30/96 18,175 19,240
12/31/96 18,025 19,135
</TABLE>
*The Fund's inception was September 7, 1988. Index graph comparison begins
September 30, 1988.
SAFECO MANAGED BOND FUND**
ILLUSTRATION OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
INVESTMENT
VALUE AS OF
DEC. 31, 1996
SAFECO
MANAGED BOND
FUND:
$11,384**
==================
LEHMAN BROTHERS
GOV'T/CORP. INDEX:
$11,925
==================
<TABLE>
<CAPTION>
Ist Lehman
<S> <C> <C>
02/28/94 10,000 10,000
03/31/94 9,666 9,755
04/30/94 9,657 9,674
05/31/94 9,666 9,657
06/30/94 9,653 9,634
07/31/94 9,757 9,827
08/31/94 9,780 9,831
09/30/94 9,703 9,683
10/31/94 9,709 9,672
11/30/94 9,680 9,655
12/31/94 9,699 9,718
01/31/95 9,828 9,905
02/28/95 9,991 10,135
03/31/95 10,038 10,203
04/30/95 10,167 10,344
05/31/95 10,533 10,778
06/30/95 10,615 10,864
07/31/95 10,541 10,822
08/31/95 10,674 10,960
09/30/95 10,791 11,072
10/31/95 10,962 11,235
11/30/95 11,178 11,420
12/31/95 11,382 11,588
01/31/96 11,400 11,660
02/28/96 11,127 11,412
03/31/96 11,010 11,317
04/30/96 11,004 11,239
05/31/96 11,009 11,219
06/30/96 11,092 11,370
07/31/96 11,127 11,396
08/31/96 11,148 11,369
09/30/96 11,239 11,571
10/31/96 11,357 11,841
11/30/96 11,486 12,058
12/31/96 11,384 11,925
</TABLE>
**The Fund's inception was June 25, 1992. Index graph comparison begins February
28, 1994 (initial public offering).
-1-
<PAGE> 4
LETTER FROM THE PRESIDENT
December 31, 1996
[PHOTO OF DAVID F. HILL]
DAVID F. HILL
DEAR SHAREHOLDER:
SAFECO Mutual Funds have changed their fiscal year to coincide with the
calendar year, and so we present to you our annual report for 1996:
We entered 1996 with rather modest expectations for the equity markets and
look what happened. The S&P 500 gained 22.94% on the heels of its astonishing
37.50% growth in 1995.
The good news is, investors who had the conviction to stay invested in
common stocks were amply rewarded. For the second straight year, we're glad to
have been "in" the market, rather than "out."
The bad news is that such market conditions can cause amnesia -- amnesia
when it comes to the volatile nature of the stock market (the S&P 500 delivered
1.32% in 1994), and forgetfulness regarding the diversification that bond and
money market funds provide.
The neglected cousins of 1996 were the bond markets. Bonds struggled
through the year -- despite the fact inflation remained at bay -- reversing
directions and ultimately delivering lackluster total returns. The broader
market as measured by Lehman Brothers Government/Corporate Index returned 2.90%
for the year.
Three elements seem to be props for the stock market. Inflation has
remained in control, corporate earnings have continued to grow and there has
been a fundamental shift in the way individuals invest. Investors are
increasingly recognizing the superior long-term potential of stocks. At the same
time they are
-2-
<PAGE> 5
taking control of more of their retirement savings.
While the shift from traditional company-controlled pensions to
employee-directed plans such as 401(k)s seems irreversible, it doesn't seem
possible for the stock market to sustain its present level of growth.
Still, we believe common stocks offer the potential for superior long-term
returns as they have over the past 70 years. At the same time, we remind you of
the historical level of stock market returns. Over the last 20 years, the S&P
500 has averaged 14%, not 23% or 38% as reflected in the performance of the past
two years.
All in all, our 1997 outlook is that the financial markets will do "okay."
We anticipate bonds will return their current interest rate, and be without big
gains or losses. But then, people should buy bonds for that stream of interest
anyway.
Stocks will have a more difficult time, especially if corporate earnings
fail to meet expectations. Nonetheless, there are always opportunities for stock
pickers. And that's what we do best.
/s/ David F. Hill
David F. Hill, President
SAFECO Mutual Funds
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SAFECO High-Yield Bond Fund ........................................... 4
SAFECO GNMA Fund ...................................................... 12
SAFECO Intermediate-Term
U S Treasury Fund and
SAFECO Managed Bond Fund .............................................. 16
Financial Statements .................................................. 21
Notes to Financial Statements ......................................... 26
</TABLE>
================================================================================
-3-
<PAGE> 6
REPORT FROM THE FUND MANAGERS
SAFECO HIGH-YIELD BOND FUND
December 31, 1996
[PHOTO OF JOHN STOESER]
JOHN STOESER
[PHOTO OF BOB KERN]
BOB KERN
With a total return of 10.39% for the year ended December 31, 1996, the
SAFECO High-Yield Bond Fund underperformed the Merrill Lynch High-Yield Index,
which posted a total return of 11.27%.
Our underperformance was primarily due to our holding a greater percentage
of higher-quality junk bonds than occurs in the high-yield universe. According
to Merrill Lynch, lower-quality junk bonds outperformed higher-quality junk
bonds by a wide margin in 1996.
Though the SAFECO High-Yield Fund's total returns have been lower, our
risk-adjusted ratings have been higher. Morningstar Mutual Funds** gives SAFECO
High-Yield Bond Fund its top, five-star rating for overall performance and for
the one, three, and five years ending December 31, 1996. (The rating is based on
SAFECO High-Yield Fund's performance against 1670, 1104 and 597 taxable bond
funds for the respective periods. Only ten percent of funds in a given
investment category receive five stars; even fewer funds receive five stars
across the board.)
During the past year, the demand for high-yield bonds was strong as both
individual investors and institutions continued to pour money into the
high-yield market. We saw economic growth slow and inflation increase modestly
at both the producer and consumer levels in the second half of 1996. The most
significant of these increases were in energy and wage costs. If these costs are
passed on in the form of higher prices, consumers may spend less. Or, if
companies are unable to increase prices, corporate profit margins and earnings
may decline.
Both scenarios have the potential to cause credit quality in
-4-
<PAGE> 7
the high-yield market to deteriorate. Under such circumstances, higher-quality,
noncyclical junk bonds should outperform lower-quality junk bonds.
The majority of securities added during the past year have been
noncyclicals, that is, bonds issued by companies that are not highly sensitive
to the economic cycle. They include Chattem (branded health and beauty
products), PRINTPACK (flexible packaging), SHOP VAC (wet-dry vacuums), PHONETEL
TECHNOLOGIES (pay phone operator), GORGES (quick-to-fix foods) and ALLIED WASTE
OF NORTH AMERICA (solid waste and environmental services).
On December 31, 1996, the Fund held 85 bonds issued by companies in 45
different industries. Because the Fund is so well-diversified, a default on an
individual security or a decline in one industry should not significantly affect
Fund performance.
As new managers of the Fund (Kurt Havnaer left SAFECO in
(Continued on next page.)
================================================================================
HIGHLIGHTS
As of December 31, 1996
SAFECO
HIGH-YIELD BOND FUND
S&P CREDIT RATING DISTRIBUTION
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ratings Percent of Net Assets
<S> <C>
BB 27%
B 66
CCC 1
Not Rated 2
Cash & Other Assets Less Liabilities 4
100%
</TABLE>
SAFECO
HIGH-YIELD BOND FUND
TOP FIVE INDUSTRIES
AS A PERCENT OF NET ASSETS
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Top 5 Industries Percent of Net Assets
<S> <C>
Broadcast Media 10%
Food 7
Containers/Packaging 5
Advertising 5
Hotels/Motels 5
</TABLE>
CURRENT YIELD (30-Day) ........................................... 8.73%
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE MATURITY ........................................ 7.52 YEARS
================================================================================
-5-
<PAGE> 8
REPORT FROM THE
HIGH-YIELD BOND FUND MANAGERS (Continued)
November 1996), our strategy will be to build and maintain a core portfolio that
pursues total return and provides diversified exposure. Structured to keep the
Fund in step with the high-yield market, the core holdings will generally
resemble the market in terms of sector and industry weighting, credit quality,
and yield.
To outperform, we'll supplement the core with securities that offer
exceptional potential. These return enhancers might take advantage of
opportunities in undervalued or out-of-favor sectors and companies. They might
be bonds that are candidates for credit-rating upgrades, or capital appreciation
vehicles, such as preferred stocks and convertible bonds.
As your Fund's new managers, we'll be wielding our expertise in bond and
equity analysis to bring the best high-yield bonds have to offer to your
portfolio.
/s/ John Stoeser
- ----------------
John Stoeser
/s/ Bob Kern
- ----------------
Bob Kern
- --------------------------------------------------------------------------------
John Stoeser is an equity analyst and portfolio manager as well as co-manager of
the High-Yield Fund. He joined SAFECO in 1987; he has a B.S. in accounting from
Washington State University and is a Chartered Financial Analyst.
Bob Kern is a bond analyst as well as co-manager of the High-Yield Fund. He
joined SAFECO in 1988 with B.S. degrees in business and accounting from the
University of Washington and University of Puget Sound respectively. Bob is a
Certified Public Accountant and a Chartered Financial Analyst.
** Morningstar proprietary ratings reflect historical risk-adjusted performance
through 12/31/96. These ratings may change monthly and are calculated for the
Fund's 3-, 5- and 10-year average annual returns 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. The one-year rating is
calculated using the same methodology but is not a component of the overall
rating.
-6-
<PAGE> 9
HIGHLIGHTS
SAFECO HIGH-YIELD BOND FUND (Continued)
As of December 31, 1996
<TABLE>
<CAPTION>
TOP FIVE HOLDINGS PERCENT OF NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Jones Intercable, Inc. .................................. 2.2%
(Broadcast Media)
Specialty Equipment Companies, Inc. ..................... 2.2%
(Machinery)
Owens-Illinois, Inc. .................................... 2.1%
(Containers/Packaging)
Gorges/Quick-To-Fix Foods ............................... 2.1%
(Food)
Lamar Advertising Co. ................................... 2.1%
(Advertising)
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE PURCHASES
(October to December) COST (000'S)
- --------------------------------------------------------------------------------
<S> <C>
Gorges/Quick-To-Fix Foods ............................... $1,000
PhoneTel Technologies ................................... 1,000
Specialty Paper ......................................... 1,000
Lamar Advertising Co. ................................... 1,000
Unisys Corp. ............................................ 650
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE SALES
(October to December) PROCEEDS (000'S)
- --------------------------------------------------------------------------------
<S> <C>
Boyd Gaming Corp. ........................................ $2,100
Unisys Corp. ............................................. 650
Specialty Paper .......................................... 501
Foamex, L.P. ............................................. 369
Alliance Entertainment Corp. ............................. 338
</TABLE>
-7-
<PAGE> 10
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS - 95.9%
ADVERTISING - 5.0%
$1,000 Heritage Media Corp.
8.75%, due 2/15/06 ................................. $ 960
1,000 Lamar Advertising Co.
9.625%, due 12/01/06 ............................... 1,035
500 Universal Outdoor
9.75%, due 10/15/06 ................................ 515
AGRICULTURE/FERTILIZER PRODUCTS - 1.1%
500 Arcadian Partners, L.P.
10.75%, due 5/01/05 ................................ 555
AUTOS & AUTO PARTS - 1.0%
500 Exide Corp.
10.75%, due 12/15/02 ............................... 523
BEVERAGE - 1.5%
750 Coca-Cola Bottling Group
(Southwest), Inc.
9.00%, due 11/15/03 ................................ 761
BROADCAST MEDIA - 10.0%
1,000 American Telecasting
0.00%/14.50%, due 6/15/04 .......................... 410
500 Cablevision Systems Corp.
9.875%, due 5/15/06 ................................ 513
Century Communications Corp.
500 11.875%, due 10/15/03 .............................. 529
500 9.50%, due 3/01/05 ................................. 510
Jones Intercable, Inc.
1,000 11.50%, due 7/15/04 ................................ 1,086
500 9.625%, due 3/15/02 ................................ 525
500 Lenfest Communications, Inc.
8.375%, due 11/01/05 ............................... 483
500 Sinclair Broadcast Group, Inc.
10.00%, due 9/30/05 ................................ 509
500 Young Broadcasting, Inc.
9.00%, due 1/15/06 ................................. 486
CHEMICALS - 1.0%
500 Atlantis Group, Inc.
11.00%, due 2/15/03 ................................ 509
COMMERCIAL SERVICES - 1.0%
500 Primark Corp.
8.75%, due 10/15/00 ................................ 505
COMPUTER SOFTWARE - 1.5%
1,000 Bell & Howell Holdings Co.
0.00%/11.50%, due 3/01/05 .......................... 728
CONGLOMERATES - 1.0%
500 Figgie International, Inc.
9.875%, due 10/01/99 ............................... 520
CONTAINERS/PACKAGING - 5.2%
500 Applied Extrusion
Technologies, Inc.
11.50%, due 4/01/02 ................................ 526
Owens-Illinois, Inc.
1,000 9.75%, due 8/15/04 ................................. 1,043
500 10.25%, due 4/01/99 ................................ 504
500 US Can Corp.
10.125%, due 10/15/06 .............................. 525
COSMETICS - 1.1%
500 Coty, Inc.
10.25%, due 5/01/05 ................................ 531
DRUGS - 1.6%
750 Chattem, Inc.
12.75%, due 6/15/04 ................................ 780
ELECTRONICS - 1.0%
500 Plantronics, Inc.
10.00%, due 1/15/01 ................................ 524
ENVIRONMENTAL - 1.0%
500 Allied Waste
10.25%, due 12/01/06 ............................... 524
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-8-
<PAGE> 11
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
FINANCIAL - 1.0%
$ 500 Scotsman Group, Inc.
9.50%, due 12/15/00 ................................ $ 516
FOOD - 6.7%
500 Chiquita Brands
International, Inc.
10.25%, due 11/01/06 ............................... 533
500 Curtice Burns Foods
12.25%, due 2/01/05 ................................ 518
250 Foodbrands America, Inc.
10.75%, due 5/15/06 ................................ 265
1,000 Gorges/Quick-To-Fix Foods
11.50%, due 12/01/06 ............................... 1,036
500 International Home Foods
10.375%, due 11/01/06 .............................. 520
500 Specialty Foods Corp.
11.125%, due 10/01/02 .............................. 475
GAMING - 2.9%
500 Aztar Corp.
11.00%, due 10/01/02 ............................... 483
500 Boyd Gaming Corp.
9.25%, due 10/01/03 ................................ 488
500 Station Casinos, Inc.
9.625%, due 6/01/03 ................................ 495
HARDWARE & TOOLS - 1.6%
750 Shop Vac Corp.
10.625%, due 9/01/03 ............................... 789
HEALTH CARE - 1.1%
500 GranCare, Inc.
9.375%, due 9/15/05 ................................ 536
HOME BUILDING - 2.5%
500 Beazer Homes USA, Inc.
9.00%, due 3/01/04 ................................. 484
Toll Corp.
250 10.50%, due 3/15/02 ................................ 259
500 8.75%, due 11/15/06 ................................ 498
HOSPITAL MANAGEMENT - 4.1%
500 ORNDA Healthcorp.
12.25%, due 5/15/02 ................................ 531
1,000 Quorum Health Group, Inc.
8.75%, due 11/01/05 ................................ 1,026
500 Universal Health Services, Inc.
8.75%, due 8/15/05 ................................. 513
HOTELS/MOTELS - 4.6%
500 HMH Properties, Inc.
9.50%, due 5/15/05 ................................. 522
500 John Q. Hammons Hotels
8.875%, due 2/15/04 ................................ 496
500 Prime Hospitality Corp.
9.25%, due 1/15/06 ................................. 508
750 Wyndham Hotel Corp.
10.50%, due 5/15/06 ................................ 795
HOUSEHOLD PRODUCTS - 1.0%
500 Ekco Group, Inc.
9.25%, due 4/01/06 ................................. 494
INDUSTRIAL PRODUCT & SUPPLIER - 1.0%
500 Printpack, Inc.
10.625%, due 8/15/06 ............................... 523
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-9-
<PAGE> 12
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
LEISURE TIME - 4.0%
$1,500 AMF Group, Inc.
0.00%/12.25%, due 3/15/06 .......................... $ 992
500 Cinemark USA, Inc.
9.625%, due 8/01/08 ................................ 500
500 E & S Holdings Corp.
10.375%, due 10/01/06 .............................. 523
MACHINERY - 0.6%
500 International Semi-Tech
Microelectronics, Inc.
0.00%/11.50%, due 8/15/03 .......................... 324
MACHINERY - DIVERSIFIED - 2.2%
1,000 Specialty Equipment
Companies, Inc.
11.375%, due 12/01/03 .............................. 1,085
MANUFACTURING - 1.0%
500 Plastic Specialties and
Technologies, Inc.
11.25%, due 12/01/03 ............................... 525
METALS - 2.0%
1,000 Commonwealth Aluminum Corp.
10.75%, due 10/01/06 ............................... 1,020
OFFICE EQUIPMENT & SUPPLIES - 0.5%
223 ANACOMP, Inc.
11.625%, due 9/30/99 ............................... 225
OIL & GAS - 3.1%
500 Crown Central Petroleum Corp.
10.875%, due 2/01/05 ............................... 511
500 Giant Industries, Inc.
9.75%, due 11/15/03 ................................ 520
500 Nuevo Energy Co.
12.50%, due 6/15/02 ................................ 536
PAPER & FOREST PRODUCTS - 2.1%
500 Specialty Paper
9.375%, due 10/15/06 ............................... 510
500 Stone Container Corp.
11.875%, due 12/01/98 .............................. 527
PUBLISHING - 1.2%
750 Affiliated Newspaper
0.00%/13.25%, due 7/1/06 ........................... 615
REAL ESTATE - 1.0%
500 Ryland Group
10.50%, due 7/15/02 ................................ 508
RESTAURANTS - 2.4%
750 Apple South, Inc.
9.75%, due 6/01/06 ................................. 757
500 Flagstar Cos., Inc.
10.75%, due 9/15/01 ................................ 457
RETAIL - DEPARTMENT STORES - 0.8%
500 K-Mart Corp.
7.95%, due 2/01/23 ................................. 410
RETAIL - GROCERS - 2.7%
398 Grand Union Co.
12.00%, due 9/01/04 ................................ 422
500 Smith's Food & Drug Centers, Inc.
11.25%, due 5/15/07 ................................ 552
500 Southland Corp.
4.50%, due 6/15/04 ................................. 387
RETAIL - OTHER - 1.2%
Petroleum Heat & Power Co.
325 12.25%, due 2/01/05 ................................ 363
250 9.375%, due 2/01/06 ................................ 242
SAVINGS & LOAN - SAVINGS BANK - 1.1%
500 First Nationwide Escrow
10.625%, due 10/01/03 .............................. 540
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-10-
<PAGE> 13
PORTFOLIO OF INVESTMENTS (Continued)
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
STEEL - 1.4%
$ 500 Armco, Inc.
9.375%, due 11/01/00 ............................... $ 507
177 Weirton Steel Corp.
10.875%, due 10/15/99 .............................. 181
TELECOMMUNICATIONS - 3.1%
500 Paging Network
11.75%, due 5/15/02 ................................ 537
1,000 PhoneTel Technologies
12.00%, due 12/15/06 ............................... 1,035
TEXTILES - 1.0%
500 Dominion Textile (USA), Inc.
9.25%, due 4/01/06 ................................. 510
TRANSPORTATION - 2.0%
1,000 International Shipholding Corp.
9.00%, due 7/01/03 ................................. 1,013
UTILITIES - 2.0%
367 Beaver Valley Funding Corp.
8.625%, due 6/01/07 ................................ 357
240 First PV Funding
10.15%, due 1/15/16 ................................ 255
360 Midland Cogeneration
Venture, L. P.
10.33%, due 7/23/02 ................................ 384
UTILITIES - ELECTRIC DISTRIBUTION - 1.0%
500 El Paso Electric Co.
9.40%, due 5/01/11 ................................. 535
-------
TOTAL CORPORATE BONDS .......................................... 48,287
-------
PREFERRED STOCK - 0.7%
OIL & GAS - 0.7%
6,300 Nuevo Energy Co.,
$2.875 Convertible ................................. 338
-------
TOTAL PREFERRED STOCK .......................................... 338
-------
TEMPORARY INVESTMENTS - 2.2%
INVESTMENT COMPANIES:
$1,088 Short-Term Investments Co.
(Prime Portfolio) .................................. 1,088
-------
TOTAL TEMPORARY INVESTMENTS .................................... 1,088
-------
TOTAL INVESTMENTS - 98.8% ...................................... 49,713
Other Assets, less Liabilities ................................. 585
-------
NET ASSETS ..................................................... $50,298
=======
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-11-
<PAGE> 14
REPORT FROM THE FUND MANAGER
SAFECO GNMA FUND
December 31, 1996
[PHOTO OF PAUL STEVENSON]
PAUL STEVENSON
For the 12 months ending December 31, 1996, the SAFECO GNMA Fund provided
investors with a 3.98% total return. For the same period, the average GNMA fund
returned 3.81%, according to Lipper. The Merrill Lynch GNMA Index returned
5.58%.
The Fund's slight outperformance of the peer group is really a result of
my adding value while maintaining portfolio characteristics that closely
resemble the major mortgage indices. The Fund underperformed the Index because
we were underweighted in premium mortgage bonds compared to the Index, and the
fact the Index bears no management expenses and holds no cash or Treasuries.
Within the taxable bond arena, defining what worked best in 1996 is pretty
straightforward: It was staying short and reaching for yield.
This broad theme carried over to the mortgage markets. Investors reaching
for yield were well rewarded. Less liquid (issues) outperformed the more
efficient mortgage pass-throughs.
Within the pass-through market, longer mortgages outperformed shorter. But
the true performance was found in premium (bonds priced above face value because
of their higher coupons) and "seasoned" collateral. Lower-coupon discounts
(bonds priced below face value) such as the 30-year GNMA 6%-6.5% only mustered
3% total returns, while GNMA 9%+ exceeded 7% returns. The seasoneds'
outperformance can be attributed to Wall Street research highlighting these
sectors and major buying programs.
Seasoned pass-throughs (securities backed by loans which have survived a
few refinancing waves) were star performers. According to Salomon Brothers, the
total returns for 30-year mortgages for 1996 were as follows: new production
returned 4.8%, moderate seasoning returned 5.8%, and the most seasoned loan
pools returned 7.3%.
-12-
<PAGE> 15
My strategy in 1996 was, while staying fully invested, to emphasize higher
income-producing mortgage investments and to slowly build larger, highly liquid
positions (which enable flexibility and rapid execution). I generally completed
defensive "up in coupon trades" by selling assets and investing in sectors I
felt provided good value and increased portfolio income. For example, I sold off
intermediate-term U.S. Treasuries to purchase a very stable four-year
GNMA-backed CMO that provided additional yield and had good call protection. In
another case, I sold Treasuries to purchase what I feel to be an undervalued
sector -- seasoned 1993 FNMA 6.5% pass-throughs -- picking up substantial
current income.
I also endeavored to maintain the Fund's portfolio characteristics
(duration, average coupon and average life) within a close range of the broad
mortgage market. At year end, the duration (sensitivity to changes in interest
rates) of the Fund stood at 4.14 years, right in between the major indices. The
portfolio's average coupon of 7.4% was slightly lower than the 7.85% average for
the indices, reflecting my efforts to give the Fund a better return profile
should rates begin to fall and the markets rally.
Approximately 85% of the portfolio is composed of 30-year seasoned
pass-throughs (mostly GNMAs), of which 20% are discounts, 33% currents and 31%
premiums. The balance of 15% is invested in CMOs.
On the whole, the 1996 mortgage market exhibited a remarkable amount of
stability and price efficiency due to strong demand. I expect continued strong
demand to produce a good bid for mortgage securities in 1997 as well. Market
efficiency will continue to make it difficult to enhance portfolio returns by
finding "mispriced" pockets of value. As for interest rates, much depends on the
Federal Reserve. Given this environment, staying short and reaching for yield
may work again in 1997.
Within that context, SAFECO GNMA Fund will work to enhance
(Continued on next page.)
-13-
<PAGE> 16
================================================================================
HIGHLIGHTS
As of December 31, 1996
SAFECO GNMA FUND
CURRENT 30-DAY YIELD
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DATE YIELD
<S> <C>
09/30/96 6.75
10/31/96 6.72
11/30/96 6.46
12/31/96 6.58
</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 THREE MONTHS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DATE YIELD
<S> <C>
09/30/96 5.66
10/31/96 5.55
11/30/96 5.35
12/31/96 5.14
</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)
returns, while resembling the broad mortgage securities market. I expect the
latter to once again outperform the Treasury markets, just nudge out
investment-grade corporates, but lag the lower-rated junk bond market.
/s/ Paul Stevenson
- ------------------
Paul Stevenson,
SAFECO 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, an MBA from the University of Washington, and is a
Chartered Financial Analyst.
-14-
<PAGE> 17
PORTFOLIO OF INVESTMENTS
SAFECO GNMA FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT AND
AGENCY SECURITIES - 99.0%
COLLATERIZED MORTGAGE OBLIGATION (CMO) - 13.9%
$5,000 7.00%, FNMA PAC 1,
due 6/17/26 ........................................ $5,053
494 4.50%, REMIC PD1,
due 3/15/21 ........................................ 441
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA) - 13.8%
5,688 6.50%, due 8/01/23-12/01/23 ........................ 5,465
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA) - 71.3%
1,573 9.50%, due 3/15/20 ................................. 1,703
6,167 8.50%, due 5/20/22-10/15/25 ........................ 6,397
4,223 8.00%, due 6/15/21-12/15/22 ........................ 4,336
13,307 7.50%, due 1/15/22-4/20/23 ......................... 13,375
2,446 7.00%, due 2/20/26-3/20/26 ......................... 2,381
-------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES .................... 39,151
-------
TEMPORARY INVESTMENTS - 0.9%
INVESTMENT COMPANIES:
$348 Short-Term Investments Co.
(Prime Portfolio) .................................. $ 348
-------
TOTAL TEMPORARY INVESTMENTS .................................... 348
-------
TOTAL INVESTMENTS - 99.9% ...................................... 39,499
Other Assets, less Liabilities ................................. 44
-------
NET ASSETS ..................................................... $39,543
=======
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-15-
<PAGE> 18
REPORT FROM THE FUND MANAGER
SAFECO INTERMEDIATE-TERM
U.S. TREASURY FUND AND
SAFECO MANAGED BOND FUND
December 31, 1996
[PHOTO OF MICHAEL C. KNEBEL]
MICHAEL C. KNEBEL
Both the Intermediate-Term U.S. Treasury and Managed Bond Funds are
actively managed using a trend-following strategy: that is, we invest in concert
with interest rate trends. We reduce the Funds' average maturities as rates
rise, and increase them as rates fall. In general under this strategy, returns
at first lag, and then surpass the market as a new trend unfolds.
A market which changes course frequently, however, wreaks havoc on funds
which employ trend-following strategies. In other words, our strategy sustained
a recurrent case of whiplash in '96. The Funds suffered at the hands of a
capricious market in which rates oscillated furiously only to end the year
markedly higher.
We began 1996 with a long average maturity in response to 1995's bull
market. When rates rose rapidly and unexpectedly in the early part of this year,
the performance of both Funds lagged. In the second and third quarters, we
recouped our losses by maintaining shorter average maturities as rates continued
climbing.
Ironically, this same defensive posture caused us to lag in the fourth
quarter as rates began to fall. The good news/bad news is that as rates reverted
upward yet again, rising in December and into early 1997, our defensive strategy
is finally paying off.
-16-
<PAGE> 19
Looking ahead to 1997, we expect this market volatility to continue and
the investment environment to remain challenging. Renewed economic strength will
likely rekindle inflation fears which, in turn, may prompt speculation that the
Federal Reserve will raise short-term interest rates. We think any talk of Fed
tightening is still premature.
While we've yet to see evidence the economy is overheating, we wouldn't be
surprised to see rates move higher anyway, as the bond market responds bearishly
to a more bullish outlook for the economy. We will seek to increase the Funds'
yields while maintaining their conservative risk profiles. And that should
better insulate both the Intermediate-Term U.S. Treasury Fund and the Managed
Bond Fund from the effects of gyrating interest rates.
THE SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND returned 0.38% for the
year ended December 31, 1996. On average, intermediate-term Treasury funds, as
measured by Lipper Analytical Services, had a 12-month return of 2.10%. The
sector, as measured by the Merrill Lynch Intermediate Treasury Index (which
includes no operating expenses or transaction costs), returned 3.89% for the
year.
THE SAFECO MANAGED BOND FUND returned 0.02% for the year ended December
31, 1996. The sector as a whole, as measured by the Lehman Brothers
Government/Corporate Index (and
(Continued on next page.)
-17-
<PAGE> 20
================================================================================
HIGHLIGHTS
As of December 31, 1996
SAFECO MANAGED
BOND FUND
S&P CREDIT RATING DISTRIBUTION
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
S&P Credit Rating Distribution Net Assets
<S> <C>
AAA 72%
AA 11
A 14
Cash & Other Assets, Less Liabilities 3
100%
</TABLE>
SAFECO MANAGED
BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of
Bonds by Type Net Assets
<S> <C>
U.S. Treasury Securities 70%
Utilities 13
Banking & Finance 9
Canadian Provinces, U.S. Funds 2
Asset Backed Securities 2
Cash, Temparary Investments and Other 4
100%
</TABLE>
<TABLE>
<S> <C>
CURRENT YIELD (30-DAY) ...................................... 5.42%
- --------------------------------------------------------------------------------
WEIGHTED AVERAGE MATURITY ................................... 4.87 YEARS
</TABLE>
================================================================================
REPORT FROM THE
INTERMEDIATE-TERM U.S. TREASURY FUND AND MANAGED BOND FUND MANAGER (Continued)
without accounting for investment expenses or transaction costs), returned 2.90%
for the year.
We have gradually reduced the allocation to corporate bonds to about 25%
of net assets as the difference in yield narrowed, diminishing the
attractiveness of the corporate sector. We also increased the Managed Bond
Fund's duration (sensitivity to interest rates) to just under four years -- it
was two years at September 30, 1996. Still,
-18-
<PAGE> 21
Managed Bond Fund's duration remains considerably shorter than the general
market's duration.
/s/ Michael Knebel,
- ----------------------------
Michael Knebel,
Portfolio Manager
SAFECO Intermediate-Term
U.S. Treasury Fund and
SAFECO Managed Bond Fund
- --------------------------------------------------------------------------------
Mike Knebel has managed bond portfolios for SAFECO since 1989. Before that he
managed municipal bond and money market funds for Lutheran Brotherhood. He
earned his M.B.A. in Finance at the University of Minnesota, and he is a
Chartered Financial Analyst.
PORTFOLIO OF INVESTMENTS
SAFECO
INTERMEDIATE-TERM
U.S. TREASURY FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
U.S. GOVERNMENT SECURITIES - 98.4%
U.S. Treasury Notes - 86.6%
$2,450 7.75%, due 2/15/01 ................................. $ 2,589
1,300 7.50%, due 11/15/01 ................................ 1,369
2,505 7.25%, due 8/15/04 ................................. 2,637
6,110 6.875%, due 3/31/00 ................................ 6,247
670 6.00%, due 10/15/99 ................................ 670
U.S. Treasury Principal Strips - 11.8%
2,160 0.00%, due 8/15/99 ................................. 1,849
-------
TOTAL U.S. GOVERNMENT SECURITIES ............................... 15,361
-------
TEMPORARY INVESTMENTS - 0.2%
INVESTMENT COMPANIES:
33 Short-Term Investments Co.
(Prime Portfolio) .................................. 33
-------
TOTAL TEMPORARY INVESTMENTS .................................... 33
-------
TOTAL INVESTMENTS - 98.6% ...................................... 15,394
Other Assets, less Liabilities ................................. 212
-------
NET ASSETS ..................................................... $15,606
=======
- --------------------------------------------------------------------------------
</TABLE>
-19-
<PAGE> 22
PORTFOLIO OF INVESTMENTS
SAFECO MANAGED BOND FUND
As of December 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES-1.9%
<S> <C>
FINANCIAL - 1.9%
$84 Chevy Chase Auto ABS
Series 1996-1, Class A
6.60%, due 12/15/02 ................................ $ 84
------
TOTAL ASSET-BACKED SECURITIES .................................. 84
------
CORPORATE BONDS-24.7%
BANKING & FINANCE - 9.1%
100 Associates Corp. of
North America
8.80%, due 8/01/98 ................................. 104
100 International Lease Finance Corp.
6.625%, due 4/01/99 ................................ 101
100 Norwest Financial, Inc.
6.25%, due 3/15/99 ................................. 100
100 Transamerica Finance Corp.
6.80%, due 3/15/99 ................................. 101
CANADIAN PROVINCES, U.S. FUNDS - 2.4%
100 Manitoba (Province)
9.50%, due 9/15/98 ................................. 105
UTILITIES - 13.2%
100 Central Power & Light Co.
7.50%, due 5/01/99 ................................. 102
100 Consolidated Natural Gas Co.
5.875%, due 10/01/98 ............................... 100
185 GTE California, Inc.
6.25%, due 1/15/98 ................................. 186
100 Nova Gas Transmission
7.25%, due 7/06/99 ................................. 102
100 Virginia Electric & Power Co.
7.25%, due 3/01/97 ................................. 100
------
TOTAL CORPORATE BONDS .......................................... 1,101
------
U.S. GOVERNMENT SECURITIES - 70.0%
U. S. TREASURY NOTES - 64.2%
$ 370 7.75%, due 12/31/99 ................................ $ 387
320 7.50%, due 2/15/05 ................................. 342
1,245 7.25%, due 8/15/04 ................................. 1,311
350 6.50%, due 5/31/01 ................................. 354
465 6.375%, due 8/15/02 ................................ 468
U. S. TREASURY PRINCIPAL STRIPS - 5.8%
300 0.00%, due 8/15/99 ................................. 257
------
TOTAL U.S. GOVERNMENT SECURITIES ............................... 3,119
------
TEMPORARY INVESTMENTS-1.6%
INVESTMENT COMPANIES:
69 Short-Term Investments Co.
(Prime Portfolio) .................................. 69
------
TOTAL TEMPORARY INVESTMENTS .................................... 69
------
TOTAL INVESTMENTS - 98.2% ...................................... 4,373
Other Assets, less Liabilities ................................. 82
------
NET ASSETS ..................................................... $4,455
======
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-20-
<PAGE> 23
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO SAFECO INTERMEDIATE-TERM MANAGED
(In Thousands, Except HIGH-YIELD GNMA U.S. TREASURY BOND
Per-Share Amounts) BOND FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at Cost $48,480 $38,560 $15,390 $4,376
======= ======= ======= ======
Investments, at Value $49,713 $39,499 $15,394 $4,373
Cash -- -- -- 14
Receivables
Interest $1,039 243 269 83
Trust Shares Sold 449 4 16 --
Deferred Organization Expense -- -- -- 13
------- ------- ------- ------
Total Assets 51,201 39,746 15,679 4,483
LIABILITIES
Payables
Trust Shares Redeemed 723 95 17 --
Dividends 132 66 43 1
Investment Advisory Fees 30 23 8 2
Organization Expense -- -- -- 13
Other 18 19 5 12
------- ------- ------- ------
Total Liabilities 903 203 73 28
------- ------- ------- ------
Net Assets $50,298 $39,543 $15,606 $4,455
======= ======= ======= ======
- -------------------------------------------------------------------------------------------------
No Load Class:
Net Assets $50,298 $39,543 $14,679 $4,215
Trust Shares Outstanding 5,703 4,226 1,452 $ 505
------- ------- ------- ------
Net Asset Value, Offering Price and
Redemption Price Per Share $ 8.82 $ 9.36 $10.11 $8.35
======= ======= ======= ======
Class A:
Net Assets -- -- $ 704 $ 140
Trust Shares Outstanding -- -- 70 $ 17
------- ------
Net Asset Value and Redemption
Price Per Share -- -- $10.11 $8.35
======= ======
Maximum Offering Price Per Share
(Net Asset Value Plus Sales
Charge of 4.5%) -- -- $10.59 $8.74
======= ======
Class B:
Net Assets -- -- $ 223 $ 100
Trust Shares Outstanding -- -- 22 12
------- ------
Net Asset Value and Offering
Price Per Share* -- -- $10.12 $8.35
======= ======
</TABLE>
* Redemption price per share is the net asset value less any applicable
contingent deferred sales charge.
-21-
<PAGE> 24
STATEMENTS OF OPERATIONS
For the Period Ended December 31, 1996
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO SAFECO INTERMEDIATE-TERM MANAGED
HIGH-YIELD GNMA U.S. TREASURY BOND
(In Thousands) BOND FUND* FUND* FUND* FUND**
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $1,208 $ 745 $275 $263
EXPENSES
Investment Advisory Fees 82 65 21 21
Transfer Agent Fees 17 17 6 --
Legal and Auditing Fees 12 13 12 13
Custodian Fees 4 4 1 5
Loan Interest Expense -- 2 -- --
Reports to Shareholders -- -- 1 6
Amortization of
Organization Expenses -- -- -- 6
Trustee Fees 1 -- -- 4
------- ------ ----- -----
Total Expenses
Before Reimbursement 116 101 41 55
Expense Reimbursement -- -- (8) --
------- ------ ----- -----
Total Expenses
After Reimbursement 116 101 33 55
------- ------ ----- -----
NET INVESTMENT INCOME 1,092 644 242 208
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net Realized Gain (Loss)
on Investments (426) 31 (125) 2
Net Change in Unrealized
Appreciation (Depreciation) 597 403 144 (210)
------- ------ ----- -----
NET GAIN (LOSS) ON INVESTMENTS 171 434 19 (208)
------- ------ ----- -----
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $1,263 $1,078 $261 $ 0
======= ====== ===== =====
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* For the Three-Month Period Ended December 31, 1996
** For the Year Ended December 31, 1996
SEE NOTES TO FINANCIAL STATEMENTS
-22-
<PAGE> 25
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO SAFECO INTERMEDIATE-TERM MANAGED
HIGH-YIELD GNMA U.S. TREASURY BOND
(In Thousands) BOND FUND* FUND* FUND* FUND**
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $4,084 $3,144 $902 $293
EXPENSES
Investment Advisory Fees 255 270 78 23
Transfer Agent Fees 90 111 39 --
Legal and Auditing Fees 14 14 13 12
Custodian Fees 13 18 5 2
Loan Interest Expense 1 1 -- --
Reports to Shareholders 10 14 4 --
Amortization of
Organization Expenses -- -- -- 6
Trustee Fees 5 5 5 11
------ ------- ----- ----
Total Expenses 388 433 144 54
------ ------- ----- ----
NET INVESTMENT INCOME 3,696 2,711 758 239
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net Realized Gain (Loss)
on Investments 504 (416) 290 167
Net Change in Unrealized
Appreciation (Depreciation) 46 (453) (496) 331
------ ------- ----- ----
NET GAIN (LOSS) ON INVESTMENTS 550 (869) (206) 498
------ ------- ----- ----
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $4,246 $1,842 $552 $737
====== ======= ===== ====
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the Year Ended September 30, 1996
** For the Year Ended December 31, 1995
SEE NOTES TO FINANCIAL STATEMENTS
-23-
<PAGE> 26
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SAFECO HIGH-YIELD BOND FUND SAFECO GNMA FUND
------------------------------------ ------------------------------------
THREE- THREE-
MONTH MONTH
PERIOD YEAR YEAR PERIOD YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31 SEPT. 30 SEPT. 30 DEC. 31 SEPT. 30 SEPT. 30
(In Thousands) 1996 1996 1995 1996 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income $ 1,092 $ 3,696 $ 2,996 $ 644 $ 2,711 $ 2,847
Net Realized Gain (Loss) on
Investments (426) 504 (579) 31 (416) (1,292)
Net Change in Unrealized
Appreciation (Depreciation) 597 46 1,459 403 (453) 3,055
-------- -------- -------- -------- -------- --------
Net Change in Net Assets
Resulting from Operations 1,263 4,246 3,876 1,078 1,842 4,610
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income
No-Load Class (1,092) (3,696) (2,996) (644) (2,711) (2,847)
Class A -- -- -- -- -- --
Class B -- -- -- -- -- --
NET REALIZED GAIN ON
INVESTMENTS - NO-LOAD -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
TOTAL (1,092) (3,696) (2,996) (644) (2,711) (2,847)
NET TRUST SHARE TRANSACTIONS
No-Load Class 2,247 8,152 11,086 (594) (3,483) (3,884)
Class A -- -- -- -- -- --
Class B -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
TOTAL 2,247 8,152 11,086 (594) (3,483) (3,884)
-------- -------- -------- -------- -------- --------
TOTAL CHANGE IN NET ASSETS 2,418 8,702 11,966 (160) (4,352) (2,121)
NET ASSETS AT BEGINNING OF PERIOD 47,880 39,178 27,212 39,703 44,055 46,176
-------- -------- -------- -------- -------- --------
NET ASSETS AT END OF PERIOD $50,298 $47,880 $39,178 $39,543 $39,703 $44,055
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
TRUST SHARE TRANSACTIONS
INCREASE (DECREASE) IN TRUST SHARES
Sales 1,190 6,549 7,306 107 694 927
Reinvestments 78 251 190 48 198 215
Redemptions (1,013) (5,863) (6,168) (218) (1,267) (1,582)
-------- -------- -------- -------- -------- --------
NET CHANGE 255 937 1,328 (63) 375 (440)
======== ======== ======== ======== ======== ========
INCREASE (DECREASE) IN AMOUNTS
Sales $10,466 $56,960 $62,149 $ 1,008 $ 6,526 $ 8,523
Reinvestments 690 2,181 1,463 447 1,858 1,976
Redemptions (8,909) (50,989) (52,526) (2,049) (11,867) (14,383)
-------- -------- -------- -------- -------- --------
Net Change $ 2,247 $ 8,152 $11,086 $ (594) $(3,483) $(3,884)
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-24-
<PAGE> 27
<TABLE>
<CAPTION>
SAFECO INTERMEDIATE-TERM SAFECO MANAGED
U.S. TREASURY FUND BOND FUND
------------------------------------ --------------------
THREE-
MONTH
PERIOD YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DEC. 31 SEPT. 30 SEPT. 30 DEC. 31 DEC. 31
(In Thousands) 1996 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income $ 242 $ 758 $ 720 $ 208 $ 238
Net Realized Gain (Loss) on
Investments (125) 290 7 2 167
Net Change in Unrealized
Appreciation (Depreciation) 144 (496) 638 (210) 331
-------- -------- -------- ------- -------
Net Change in Net Assets
Resulting from Operations 261 552 1,365 0 736
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income
No-Load Class (232) (758) (720) (206) (238)
Class A (8) -- -- (1) --
Class B (2) -- -- (1) --
NET REALIZED GAIN ON
INVESTMENTS - NO-LOAD -- -- -- (2) (156)
-------- -------- -------- ------- -------
TOTAL (242) (758) (720) (210) (394)
NET TRUST SHARE TRANSACTIONS
No-Load Class 189 900 (238) (72) (472)
Class A 607 100 -- 140 --
Class B 123 100 -- 100 --
-------- -------- -------- ------- -------
TOTAL 919 1,100 (238) 168 (472)
-------- -------- -------- ------- -------
TOTAL CHANGE IN NET ASSETS 938 894 407 (42) (130)
NET ASSETS AT BEGINNING OF PERIOD 14,668 13,774 13,367 4,497 4,627
-------- -------- -------- ------- -------
NET ASSETS AT END OF PERIOD $15,606 $14,668 $13,774 $4,455 $4,497
======== ======== ======== ======= =======
- ------------------------------------------------------------------------------------------------------
OTHER INFORMATION
TRUST SHARE TRANSACTIONS
INCREASE (DECREASE) IN TRUST SHARES
Sales 149 1,516 431 30 --
Reinvestments 12 35 37 24 44
Redemptions (70) (1,444) (495) (33) (99)
-------- -------- -------- ------- -------
NET CHANGE 91 107 (27) 21 (55)
======== ======== ======== ======= =======
INCREASE (DECREASE) IN AMOUNTS
Sales $ 1,515 $18,860 $ 4,265 $ 246 $ --
Reinvestments 117 358 374 201 382
Redemptions (713) (18,118) (4,877) (279) (855)
-------- -------- -------- ------- -------
NET CHANGE $ 919 $ 1,100 $ (238) $ 168 $ (473)
======== ======== ======== ======= =======
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-25-
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The SAFECO Taxable Bond Trust (consisting of the SAFECO High-Yield Bond
Fund, SAFECO GNMA Fund, and SAFECO Intermediate-Term U.S. Treasury Fund) and the
SAFECO Managed Bond Trust (consisting of the SAFECO Managed Bond Fund) (together
"the Funds") are registered under the Investment Company Act of 1940, as
amended, as diversified, open-end management investment companies. The Taxable
Bond Trust recently changed its fiscal year end from September 30, to December
31.
Effective September 30, 1996, the Intermediate-Term U.S. Treasury Fund and
Managed Bond Fund began issuing two additional 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 additional 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.
Effective January 31, 1997, the SAFECO High-Yield Bond Fund will also begin
issuing Advisor classes of shares.
In connection with issuing the new Advisor Classes, the Intermediate-Term
U.S. Treasury, Managed Bond, and High-Yield Bond Funds adopted a Plan of
Distribution (the "Plan"). Under the Plan, each Advisor Class pays the
distributor, SAFECO Securities, Inc., for servicing its shares at the annual
rate of .25% of the average daily net assets of the Advisor Class. Class B
shares also pay the distributor a distribution fee at the annual rate of .75% of
the average daily net assets of the Class B shares.
Under the Plans, the distributor uses the service fees primarily to
compensate persons selling Advisor Class shares for providing ongoing services
and the maintenance of shareholder accounts. The distributor uses the
distribution fees primarily to offset the commissions it pays to financial
advisors for selling Class B shares.
2. SIGNIFICANT
ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by 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.
-26-
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (Continued)
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. Short-term investments purchased at par are
valued at cost. All other short-term 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 Managed Bond Fund has elected to amortize premium on securities purchased
above par value. The Funds in the Taxable Bond Trust have not elected to
amortize premium on 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 December.
FEDERAL INCOME AND EXCISE TAXES. Each Fund intends to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies by distributing substantially all taxable income to their shareholders
in a manner which results in no tax to the Funds. Therefore, no federal income
or excise tax provision is required.
-27-
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (Continued)
3. INVESTMENT TRANSACTIONS
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO SAFECO INTERMEDIATE-TERM MANAGED
HIGH-YIELD GNMA U.S. TREASURY BOND
(In Thousands) BOND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PURCHASES FOR THE
PERIOD ENDED DECEMBER 31, 1996*
(excluding short-term securities
and including $0, $5,074, $10,335,
and $4,427 respectively, of U.S.
Government obligations) $9,471 $5,074 $10,335 $4,527
====== ====== ======= ======
SALES FOR THE
PERIOD ENDED DECEMBER 31, 1996*
(excluding short-term securities
and including $0, $5,840, $3,938,
and $3,938 respectively, of U.S.
Government obligations) $4,065 $5,840 $3,938 $4,508
====== ====== ======= ======
</TABLE>
* For the three-month period ended December 31, 1996 (High-Yield, GNMA, and
Intermediate-Term U.S. Treasury Funds) and for the year ended December 31,
1996 (Managed Bond Fund).
- --------------------------------------------------------------------------------
4. COMPONENTS OF NET ASSETS
At December 31, 1996, the components of net assets were as follows:
<TABLE>
<CAPTION>
SAFECO SAFECO
SAFECO SAFECO INTERMEDIATE-TERM MANAGED
HIGH-YIELD GNMA U.S. TREASURY BOND
(In Thousands) BOND FUND FUND FUND FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate gross unrealized appreciation
for investment securities in which
there is an excess of value over
identified cost $ 1,798 $ 1,050 $ 83 $ 20
Aggregate gross unrealized depreciation
for investment securities in which
there is an excess of identified cost
over value (565) (111) (79) (23)
-------- -------- -------- -------
Net unrealized appreciation
(depreciation) $ 1,233 $ 939 $ 4 $ (3)
Accumulated net realized (loss) on
investment transactions* (1,293) (2,983) (196) --
Paid in capital (par value $.001,
unlimited shares authorized) 50,358 41,587 15,798 4,458
-------- -------- -------- -------
Net Assets as of December 31, 1996 $50,298 $39,543 $15,606 $4,455
======== ======== ======== =======
</TABLE>
*The above accumulated net realized losses on investment transactions represents
capital loss carryforwards for federal income tax purposes, which expire as
follows
<TABLE>
<CAPTION>
(In Thousands) AMOUNTS EXPIRATION DATES
- -----------------------------------------------------------------------------------
<S> <C> <C>
SAFECO High-Yield Bond Fund $ (1,293) 1997-2001
SAFECO GNMA Fund (2,983) 1999-2003
SAFECO Intermediate-Term U.S. Treasury Fund (196) 2001
- -----------------------------------------------------------------------------------
</TABLE>
-28-
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS (Continued)
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>
HIGH-YIELD & GNMA FUNDS
First $250 million .65%
Next $250 million .55
Next $250 million .45
Over $750 million .35
MANAGED BOND FUND
First $100 million .50%
Next $150 million .40
Over $250 million .35
INTERMEDIATE-TERM U.S. TREASURY FUND
First $250 million .55%
Next $250 million .45
Next $250 million .35
Over $750 million .25
</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.
AFFILIATE OWNERSHIP. At December 31, 1996, SAFECO Corporation owned
500,000 shares (or 9%) of the High-Yield Bond Fund and SAFECO Insurance Company
of America owned 500,000 shares (or 34%) of the Intermediate-Term U.S. Treasury
Fund.
DEFERRED ORGANIZATION EXPENSES. Costs related to the organization of the
Managed Bond Fund have been deferred and are being amortized to operations over
a period of sixty months, beginning on the initial public offering date. These
costs were advanced by the investment adviser and are being reimbursed by the
Fund over a period of sixty months.
-29-
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS (Continued)
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO HIGH-YIELD BOND FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
DECEMBER 31 YEAR ENDED SEPTEMBER 30
------------ -----------------------------------------------------------
1996 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.79 $ 8.68 $ 8.55 $ 9.22 $ 8.92 $ 8.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.19 0.78 0.79 0.82 0.91 0.83
Net Realized and Unrealized
Gain (Loss) on Investments 0.03 0.11 0.13 (0.67) 0.30 0.57
------- ------- ------- ------- ------- -------
Total from Investment Operations 0.22 0.89 0.92 0.15 1.21 1.40
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.19) (0.78) (0.79) (0.82) (0.91) (0.83)
------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 8.82 $ 8.79 $ 8.68 $ 8.55 $ 9.22 $ 8.92
======= ======= ======= ======= ======= =======
TOTAL RETURN 2.50%* 10.79% 11.43% 1.61% 14.29% 17.52%
NET ASSETS AT END OF PERIOD (000's) $50,298 $47,880 $39,178 $27,212 $28,291 $19,672
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.90%** 0.94% 1.01% 1.03% 1.09% 1.05%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 8.56%** 8.99% 9.28% 9.26% 9.94% 9.66%
PORTFOLIO TURNOVER RATE 35.01%** 92.65% 38.03% 63.02% 50.27% 40.66%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not Annualized.
** Annualized.
-30-
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS (Continued)
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO GNMA FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
DECEMBER 31 YEAR ENDED SEPTEMBER 30
------------ -------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.26 $ 9.45 $ 9.05 $ 10.03 $ 9.95 $ 9.68
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.15 0.60 0.60 0.60 0.67 0.73
Net Realized and Unrealized
Gain (Loss) on Investments 0.10 (0.19) 0.40 (0.98) 0.08 0.27
-------- -------- -------- -------- -------- --------
Total from Investment Operations 0.25 0.41 1.00 (0.38) 0.75 1.00
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.15) (0.60) (0.60) (0.60) (0.67) (0.73)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 9.36 $ 9.26 $ 9.45 $ 9.05 $ 10.03 $ 9.95
======== ======== ======== ======== ======== ========
TOTAL RETURN 2.71%* 4.48% 11.49% -3.91% 7.81% 10.75%
NET ASSETS AT END OF PERIOD (000's) $ 39,543 $ 39,703 $ 44,055 $ 46,176 $ 62,720 $ 56,474
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.01%** 1.03% 1.01% 0.95% 0.93% 0.94%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 6.43%** 6.42% 6.55% 6.26% 6.71% 7.49%
PORTFOLIO TURNOVER RATE 51.06%** 47.75% 131.24% 55.12% 70.96% 24.66%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not Annualized.
** Annualized.
-31-
<PAGE> 34
================================================================================
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
DECEMBER 31 YEAR ENDED SEPTEMBER 30
------------ ------------------------------------------------------------------------
1996 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.10 $ 10.24 $ 9.74 $ 10.74 $ 10.69 $ 10.20
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.16 0.54 0.55 0.52 0.60 0.72
Net Realized and Unrealized
Gain (Loss) on Investments 0.01 (0.14) 0.50 (1.00) 0.49 0.54
-------- -------- -------- -------- -------- --------
Total from Investment Operations 0.17 0.40 1.05 (0.48) 1.09 1.26
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.16) (0.54) (0.55) (0.52) (0.60) (0.72)
Distributions from Capital Gains -- -- -- -- (0.44) (0.05)
-------- -------- -------- -------- -------- --------
Total Distributions (0.16) (0.54) (0.55) (0.52) (1.04) (0.77)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 10.11 $ 10.10 $ 10.24 $ 9.74 $ 10.74 $ 10.69
======== ======== ======== ======== ======== ========
TOTAL RETURN 1.68%* 4.00% 11.07% -4.56% 10.51% 12.78%
NET ASSETS AT END OF PERIOD (000's) $ 14,679 $ 14,668 $ 13,774 $ 13,367 $ 14,706 $ 12,205
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.85%**+ 1.01% 0.96% 0.90% 0.99% 0.98%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 6.30%** 5.30% 5.51% 5.08% 5.52% 6.89%
PORTFOLIO TURNOVER RATE 125.42%** 294.25% 124.90% 75.46% 104.94% 37.19%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not Annualized.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would be 1.07%
-32-
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS (Continued)
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED DECEMBER 31, 1996
-------------------------------------------
CLASS A CLASS B
- ------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.10 $ 10.10
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.15 0.14
Net Realized and Unrealized
Gain (Loss) on Investments 0.01 0.02
------- -------
Total from Investment Operations 0.16 0.16
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.15) (0.14)
Distributions from Capital Gains -- --
------- -------
Total Distributions (0.15) (0.14)
------- -------
NET ASSET VALUE AT END OF PERIOD $ 10.11 $ 10.12
======= =======
TOTAL RETURN 1.63%* 1.55%*
NET ASSETS AT END OF PERIOD (000's) $ 704 $ 223
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.07%**+ 1.72%**+
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 6.07%** 5.35%**
PORTFOLIO TURNOVER RATE 125.42%** 125.42%**
- ------------------------------------------------------------------------
</TABLE>
* Not annualized. Total return excludes the effects of sales charges. If sales
charges were included, the total return for Classes A and B would be lower.
** Annualized.
+ Net of reimbursements by advisor. Absent the reimbursements, the ratio of
expenses to average net assets would be 1.30% and 1.95% for Class A and Class
B, respectively.
-33-
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS (Continued)
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND FUND
No-Load Class
<TABLE>
<CAPTION>
Year or Period Ended December 31
---------------------------------------------------------------
1996 1995 1994 1993+ 1992++
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.77 $ 8.15 $ 9.08 $ 9.57 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.41 0.44 0.27 (0.62) (0.50)
Net Realized and Unrealized
Gain (Loss) on Investments (0.42) 0.94 (0.93) 0.15 0.07
------- ------- ------- ------- -------
Total from Investment Operations (0.01) 1.38 (0.66) (0.47) (0.43)
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.41) (0.44) (0.27) -- --
Distributions from Capital Gains -- (0.32) -- (0.02) --
------- ------- ------- ------- -------
Total Distributions (0.41) (0.76) (0.27) (0.02) --
------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 8.35 $ 8.77 $ 8.15 $ 9.08 $ 9.57
======= ======= ======= ======= =======
TOTAL RETURN 0.02% 17.35% -3.01%# N/A N/A
NET ASSETS AT END OF PERIOD (000'S) $ 4,215 $ 4,497 $ 4,627 $ 91 $ 96
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.27% 1.16% 1.37% 11.75% 13.35%*
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.86% 5.14% 4.47% -6.75% -9.80%*
PORTFOLIO TURNOVER RATE 136.29% 78.78% 129.56% None None
- --------------------------------------------------------------------------------------------------------
</TABLE>
+ Financial highlights prior to 1994 relate only to the performance of the
initial seed investment of SAFECO Asset Management Company. Trust shares were
not yet available to the public.
# Total return from February 28, 1994 (initial public offering) to December 31,
1994; not annualized.
* Annualized.
++ For the period from June 25, 1992 (commencement of operations) to December
31, 1992.
-34-
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS (Continued)
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND FUND
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED DECEMBER 31, 1996
------------------------------------------
CLASS A CLASS B
- ------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.35 $ 8.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.11 0.09
Net Realized and Unrealized
Gain (Loss) on Investments -- --
------- --------
Total from Investment Operations 0.11 0.09
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.11) (0.09)
Distributions from Capital Gains -- --
------- --------
Total Distributions (0.11) (0.09)
------- --------
NET ASSET VALUE AT END OF PERIOD $ 8.35 $ 8.35
======= ========
TOTAL RETURN 1.34%* 1.15%*
NET ASSETS AT END OF PERIOD (000'S) $ 140 $ 100
RATIO OF EXPENSES TO
AVERAGE NET ASSETS** 1.30%** 2.07%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS** 5.22%** 4.45%**
PORTFOLIO TURNOVER RATE** 136.29%** 136.29%**
- ------------------------------------------------------------------------
</TABLE>
* Not annualized. Total return excludes the effects of sales charges. If sales
charges were included, the total return for Classes A and B would be lower.
** Annualized.
-35-
<PAGE> 38
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE SAFECO TAXABLE
BOND TRUST AND SAFECO MANAGED BOND TRUST
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments in securities, of the SAFECO Taxable
Bond Trust (comprising, respectively, the SAFECO High-Yield Bond Fund, SAFECO
GNMA Fund, and SAFECO Intermediate-Term U.S. Treasury Fund) and the SAFECO
Managed Bond Trust -- Managed Bond Fund as of December 31, 1996, and the related
statements of operations, the statements of changes in net assets, and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. 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 Taxable Bond Trust and
SAFECO Managed Bond Trust at December 31, 1996, 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 31, 1997
-36-
<PAGE> 39
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
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.
-37-
<PAGE> 40
SAFECO TAXABLE BOND FUNDS
BOARD OF TRUSTEES:
Boh A. Dickey, Chairman
Barbara J. Dingfield
David F. Hill
Richard W. Hubbard
Richard E. Lundgren
Larry L. Pinnt
John W. Schneider
OFFICERS:
David F. Hill, President
Ronald L. Spaulding
Vice President and Treasurer
Neal A. Fuller
Vice President and Controller
INVESTMENT ADVISOR:
SAFECO Asset
Management Company
DISTRIBUTOR:
SAFECO Securities, Inc.
TRANSFER AGENT:
SAFECO Services Corporation
CUSTODIAN:
U.S. Bank of Washington, N.A.
FOR SHAREHOLDER SERVICE:
Monday-Friday,
5:30am - 7:00pm Pacific Time
NATIONWIDE: 1-800-624-5711
SEATTLE: 545-7319
DEAF AND HARD OF HEARING
TTY/TDD SERVICE: 1-800-438-8718
FOR ACCOUNT INFORMATION,
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
INTERNET:
http://networth.galt.com/safeco
E-MAIL: [email protected]
GMF 660 2/97 [LOGO]
Printed on Recycled Paper.
This report must be preceded or
accompanied by a current prospectus.
(R) Registered trademark of SAFECO Corporation.
