<PAGE>
December 31, 1997
ANNUAL
REPORT
TAXABLE BOND
FUNDS
NO-LOAD CLASS
-----------------
SAFECO High-Yield Bond Fund. . . . . . . . . . . . . . . . 2
SAFECO GNMA Fund . . . . . . . . . . . . . . . . . . . . . 9
SAFECO Intermediate-Term U.S. Treasury Fund. . . . . . . .12
SAFECO Managed Bond Fund . . . . . . . . . . . . . . . . .14
[LOGO]
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO HIGH-YIELD BOND FUND
December 31, 1997
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
ROBERT KERN
Strong domestic economic growth and low inflation combined to provide a
favorable environment in which the high-yield market turned in another year of
excellent performance.
Total return for the SAFECO High-Yield Bond Fund for the year ended
December 31, 1997, was 12.79%, slightly under both the average high-yield fund,
which (according to Lipper Analytical Services) returned 12.96%, and the Merrill
Lynch High-Yield Master Index, which returned 12.83%.
The portfolio is structured for total return and somewhat similarly to the
broad high-yield market, which accounts for our returns being in line with the
index.
At year end, our portfolio was broadly diversified, with about 80 holdings
concentrated in cash-paying domestic companies. The telecom sector represented
approximately 8% of net assets. (Telecom is 8% of the Merrill Lynch High-Yield
Index.) The Telecom Act of 1996 introduced competition into both the
long-distance and local segments of the industry, and this sector has become a
large and important part of the high-yield universe as many companies have come
to the debt and equity markets seeking funding for their network expansions. I
added positions in Intermedia Communications, Qwest Communications, and
Telegroup to the Fund.
<TABLE>
<CAPTION>
PERFORMANCE OVERVIEW - NO-LOAD CLASS
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIODS ENDED DECEMBER 31, 1997
-------------------------------------------
<S> <C>
1 Year 12.79%
5 Year 10.47%
Since Inception* 9.69%
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT
VALUE
MERRILL SAFECO
LYNCH HIGH YIELD
HY INDEX BOND FUND:
$28,620 $23,517
----------------------------------------------------
<S> <C> <C>
09/30/88 10,000 10,000
10/31/88 10,156 10,144
11/30/88 10,156 10,163
12/31/88 10,271 10,207
01/31/89 10,435 10,374
02/28/89 10,471 10,436
03/31/89 10,404 10,395
04/30/89 10,346 10,399
05/31/89 10,509 10,595
06/30/89 10,653 10,757
07/31/89 10,716 10,800
08/31/89 10,697 10,850
09/30/89 10,647 10,736
10/31/89 10,507 10,470
11/30/89 10,488 10,485
12/31/89 10,475 10,443
01/31/90 10,319 10,161
02/28/90 10,111 10,007
03/31/90 10,316 10,196
04/30/90 10,377 10,259
05/31/90 10,582 10,430
06/30/90 10,702 10,692
07/31/90 10,947 10,961
08/31/90 10,612 10,460
09/30/90 10,216 10,030
10/31/90 9,888 9,736
11/30/90 9,997 9,838
12/31/90 10,098 9,987
01/31/91 10,044 10,192
02/28/91 10,459 11,076
03/31/91 10,828 11,625
04/30/91 11,159 12,026
05/31/91 11,292 12,073
06/30/91 11,415 12,347
07/31/91 11,667 12,678
08/31/91 11,894 12,970
09/30/91 12,073 13,153
10/31/91 12,352 13,600
11/30/91 12,507 13,746
12/31/91 12,551 13,899
01/31/92 12,900 14,369
02/28/92 13,124 14,732
03/31/92 13,265 14,939
04/30/92 13,257 15,017
05/31/92 13,436 15,239
06/30/92 13,610 15,414
07/31/92 13,844 15,714
08/31/92 14,015 15,914
09/30/92 14,188 16,083
10/31/92 13,910 15,876
11/30/92 14,145 16,119
12/31/92 14,292 16,324
01/31/93 14,683 16,713
02/28/93 14,974 17,012
03/31/93 15,229 17,301
04/30/93 15,339 17,420
05/31/93 15,571 17,646
06/30/93 15,866 17,975
07/31/93 16,052 18,156
08/31/93 16,161 18,322
09/30/93 16,216 18,403
10/31/93 16,446 18,753
11/30/93 16,572 18,851
12/31/93 16,709 19,049
01/31/94 17,024 19,461
02/28/94 16,941 19,326
03/31/94 16,342 18,701
04/30/94 16,211 18,469
05/31/94 16,358 18,428
06/30/94 16,429 18,512
07/31/94 16,424 18,634
08/31/94 16,484 18,772
09/30/94 16,478 18,768
10/31/94 16,411 18,818
11/30/94 16,196 18,656
12/31/94 16,333 18,852
01/31/95 16,525 19,117
02/28/95 16,873 19,730
03/31/95 17,027 19,996
04/30/95 17,349 20,513
05/31/95 17,804 21,146
06/30/95 17,894 21,289
07/31/95 18,132 21,566
08/31/95 18,140 21,679
09/30/95 18,361 21,936
10/31/95 18,615 22,116
11/30/95 18,646 22,336
12/31/95 18,888 22,710
01/31/96 19,125 23,089
02/28/96 19,310 23,160
03/31/96 19,246 23,065
04/30/96 19,285 23,097
05/31/96 19,405 23,264
06/30/96 19,455 23,368
07/31/96 19,658 23,510
08/31/96 19,937 23,802
09/30/96 20,341 24,356
10/31/96 20,419 24,567
11/30/96 20,723 25,061
12/31/96 20,850 25,269
01/31/97 21,024 25,459
02/28/97 21,410 25,851
03/31/97 20,963 25,494
04/30/97 21,124 25,821
05/31/97 21,700 26,364
06/30/97 22,032 26,772
07/31/97 22,600 27,482
08/31/97 22,612 27,449
09/30/97 23,003 27,942
10/31/97 22,986 28,085
11/30/97 23,201 28,348
12/31/97 23,517 28,620
</TABLE>
* The Fund's inception was September 7, 1988. Graph and average annual return
comparison begins September 30, 1988.
The performance graph compares a hypothetical $10,000 investment in the Fund to
a hypothetical investment in a relevant market index. The index is unmanaged and
includes no operating expenses or transaction costs. Past performance is not
predictive of future results. Principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
- 2 -
<PAGE>
- --------------------------------------------------------------------------------
S&P CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS.
[CHART]
1 BB: 14%
2 B: 69%
3 Preferred Stock: 4%
4 Not Rated: 10%
5 Cash & Other Assets Less Liabilities: 3%
Intermedia Communications is a local telephone company that provides
facilities-based services primarily to business users in the Southeastern US.
The company, which has been in a building phase, should turn cash-flow positive
during the second quarter of 1998.
Qwest Communications is building a high-capacity, long-distance fiber-optic
network along railway right-of-way capable of carrying voice, data, and internet
services. Capacity on the network is sold under contract to long-distance
companies, regional Bell operating companies, and other telecommunications
services providers.
Telegroup is a global long distance services company whose established
presence, and state-of-the art facilities, should enable them to capture a
healthy share of the European telecommunications market, as it opens up to
competition in 1998.
When buying bonds, I look at how the issuer will use the funding. I favor
companies that are borrowing to refinance higher-cost debt, expand their
business, or make a prudent acquisition. For example, in October I bought
Jitney Jungle 10 3/8% bonds. This Jackson, Mississippi grocery chain used the
proceeds to acquire DelChamps, another grocer with contiguous markets. Jitney
should be able to cut distribution costs and improve operations of the acquired
stores.
- --------------------------------------------------------------------------------
HIGHLIHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
TOP FIVE HOLDINGS NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Holmes Products Corp. (144A) . . . . . . . . . . . . . . . . . . . . . . . 2.1%
(Household Furniture & Appliances)
National Equipment Services, Inc.. . . . . . . . . . . . . . . . . . . . . 2.1
(Building Equipment)
Qwest Communications International, Inc. . . . . . . . . . . . . . . . . . 1.9
(Telecommunications)
Dyersburg Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8
(Textiles)
Jitney-Jungle Stores of America, Inc.. . . . . . . . . . . . . . . . . . . 1.8
(Retail - Food Chains)
<CAPTION>
TOP FIVE PURCHASES COST
(June to Dec.) (000'S)
- --------------------------------------------------------------------------------
<S> <C>
Holmes Products Corp. (144A) . . . . . . . . . . . . . . . . . . . . . .$1,504
National Equipment Services, Inc.. . . . . . . . . . . . . . . . . . . . 1,482
Heritage Media Services. . . . . . . . . . . . . . . . . . . . . . . . . 1,328
Qwest Communications International, Inc. . . . . . . . . . . . . . . . . 1,306
Big 5 Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,253
<CAPTION>
TOP FIVE SALES PROCEEDS
(June to Dec.) (000's)
- --------------------------------------------------------------------------------
<S> <C>
Heritage Media Services. . . . . . . . . . . . . . . . . . . . . . . . .$2,406
Snyder Oil Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,272
Specialty Equipment Co.. . . . . . . . . . . . . . . . . . . . . . . . . 1,083
AES Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995
Shop Vac Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814
<CAPTION>
PERCENT OF
TOP FIVE INDUSTRIES NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Broadcast Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11%
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Foods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Hospital Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Telephone. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
- --------------------------------------------------------------------------------
CURRENT YIELD (30-DAY) . . . . . . . . . . . . . . . . . . . . . . . . . .8.43
WEIGHTED AVERAGE MATURITY. . . . . . . . . . . . . . . . . . . . . . 8.1 YEARS
- --------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE>
- --------------------------------------------------------------------------------
REPORT FROM THE HIGH-YIELD BOND FUND MANAGER
I also established a position in National Equipment Services, a heavy-duty
equipment rental company that intends to grow via acquisition and whose bonds
were attractively priced.
I built a position in Holmes Products, a manufacturer of home comfort
products including space heaters, air conditioners and dehumidifiers. The
company's products are made under contract in China and are sold through the
major retailers such as Wal-Mart, Costco, Home Depot and through national
drugstore chains.
I sold bonds I felt offered limited upside potential. Among those sold were
Universal Outdoor, ShopVac and Snyder Oil. Universal Outdoor was acquired by
Clear-Channel Communications, and the bonds traded up nicely. ShopVac had also
appreciated substantially and it was time to put the money to work in bonds with
greater potential. Snyder Oil had also appreciated in price, and given my
negative outlook for oil and gas prices, I felt it prudent to reduce my exposure
here.
Looking forward to 1998, I am cautiously optimistic about the high-yield
market. I expect healthy economic growth, although at a somewhat slower pace
than was experienced in 1997. The financial turmoil in Asia will have some
effect on U.S. economic performance, but it is too soon to gauge its full
impact. Slower growth out of that region, together with the stronger dollar, may
contribute to continued low inflation thus may preclude the need for the Federal
Reserve to raise interest rates.
I will continue to use fundamental credit analysis to identify companies
which offer good relative performance, as well as safety of principal. While I
intend to maintain a well-diversified portfolio, when I believe it is
appropriate and opportunity for outperformance is present, I will overweight
certain market segments (such as telecom currently).
Robert Kern
- --------------------------------------------------------------------------------
Robert Kern joined SAFECO in 1988 with B.S. degrees in business and accounting
from the Universities of Washington and Puget Sound respectively. Bob is a
Certified Public Accountant and a Chartered Financial Analyst.
-4-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- ------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS - 91.9%
ADVERTISING - 1.5%
$1,000 Lamar Advertising Co.
9.625%, due 12/01/06. . . . . . . . . . .$1,076
AGRICULTURE/FERTILIZER PRODUCTS - 1.5%
1,000 Sun World International
(Series B)
11.25%, due 4/15/04 . . . . . . . . . . . 1,077
BANKS - REGIONAL - 1.9%
1,250 Bay View Capital Corp.
9.125%, due 8/15/07 . . . . . . . . . . . 1,287
BEVERAGES - 1.8%
1,250 Coca-Cola Bottling Group
(Southwest), Inc.
9.00%, due 11/15/03 . . . . . . . . . . . 1,281
BROADCASTING - 11.2%
1,250 Adelphia Communications Corp.
9.25%, due 10/01/02 . . . . . . . . . . . 1,275
Cablevision Systems Corp.
500 9.875%, due 5/15/06 . . . . . . . . . . . . 549
1,000 7.875%, due 12/15/07. . . . . . . . . . . 1,020
Century Communications Corp.
500 9.50%, due 3/01/05. . . . . . . . . . . . . 529
500 8.875%, due 1/15/07 . . . . . . . . . . . . 515
1,000 ++Intermedia Telecom, Inc. (144A)
8.875%, due 11/01/07
(acquired 10/24/97) . . . . . . . . . . . 1,025
1,000 Jones Intercable, Inc.
8.875%, due 4/01/07 . . . . . . . . . . . 1,045
500 SFX Broadcasting, Inc. (Series B)
10.75%, due 5/15/06 . . . . . . . . . . . . 548
500 Sinclair Broadcast Group, Inc.
8.75%, due 12/15/07 . . . . . . . . . . . . 500
1,000 Young Broadcasting, Inc.
9.00%, due 1/15/06. . . . . . . . . . . . 1,000
BUILDING EQUIPMENT - 2.1%
1,500 National Equipment Services, Inc.
10.00%, due 11/30/04. . . . . . . . . . . 1,481
BUILDING MATERIALS - 0.7%
500 Synthetic Industries, Inc.
9.25%, due 2/15/07. . . . . . . . . . . . . 527
CHEMICALS - 0.7%
500 Atlantis Group, Inc.
11.00%, due 2/15/03 . . . . . . . . . . . . 507
CHEMICALS - SPECIALTY - 0.7%
500 ++Sovereign Specialty
Chemicals, Inc. (144A)
9.50%, due 8/01/07
(acquired 8/05/97). . . . . . . . . . . . . 512
COMPUTERS - HARDWARE - 1.2%
1,000 HMT Technology Corp.
5.75%, due 1/15/04. . . . . . . . . . . . . 876
CONTAINERS - METAL & GLASS - 0.7%
500 Applied Extrusion
Technologies, Inc. (Series B)
11.50%, due 4/01/02 . . . . . . . . . . . . 533
COSMETICS - 2.2%
500 Coty, Inc.
10.25%, due 5/01/05 . . . . . . . . . . . . 531
1,000 French Fragrances, Inc. (Series B)
10.375%, due 5/15/07. . . . . . . . . . . 1,045
DRUGS - 2.4%
750 Chattem, Inc. (Series B)
12.75%, due 6/15/04 . . . . . . . . . . . . 855
1,000 IVAX Corp.
6.50%, due 11/15/01 . . . . . . . . . . . . 852
ELECTRONICS - 0.7%
500 Plantronics, Inc.
10.00%, due 1/15/01 . . . . . . . . . . . . 517
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- --------------------------------------------------------------------------------
<S> <C>
ENVIRONMENTAL - 1.7%
$1,000 ++Allied Waste North
America, Inc. (144A)
11.30%, due 6/01/02 Step Bond
(acquired 5/15/97). . . . . . . . . . . .$ 700
500 Allied Waste North
America, Inc.
10.25%, due 12/01/06. . . . . . . . . . . . 549
FINANCIAL - 2.1%
1,000 Americredit Corp.
9.25%, due 2/01/04. . . . . . . . . . . . . 995
500 DVI, Inc.
9.875%, due 2/01/04 . . . . . . . . . . . . 521
FOOD - 3.9%
500 Chiquita Brands International, Inc.
10.25%, due 11/01/06. . . . . . . . . . . . 546
500 Curtice Burns Foods, Inc.
12.25%, due 2/01/05 . . . . . . . . . . . . 551
1,100 ++Gorges/Quik-To-Fix Foods (144A)
11.50%, due 12/01/06
(acquired 11/25/96) . . . . . . . . . . . 1,161
500 International Home Foods, Inc.
10.375%, due 11/01/06 . . . . . . . . . . . 549
FOOTWEAR - 1.3%
1,000 Nine West Group, Inc.
8.375%, due 8/15/05 . . . . . . . . . . . . 960
GAMING - 0.8%
500 Aztar Corp.
13.75%, due 10/01/04. . . . . . . . . . . . 573
HOSPITAL MANAGEMENT - 3.2%
1,250 ++Integrated Health
Services, Inc. (144A)
9.50%, due 9/15/07
(acquired 5/30/97). . . . . . . . . . . . 1,281
1,000 Quorum Health Group, Inc.
8.75%, due 11/01/05 . . . . . . . . . . . 1,031
HOTELS/MOTELS - 0.7%
1,500 HMH Properties, Inc.
9.50%, due 5/15/05. . . . . . . . . . . . 1,532
HOUSEHOLD FURNITURE & APPLIANCES - 2.1%
1,500 ++Holmes Products Corp. (144A)
9.875%, due 11/15/07
(acquired 11/18/97) . . . . . . . . . . . 1,526
INDUSTRIAL PRODUCT & SUPPLIER - 0.7%
500 Printpack, Inc.
10.625%, due 8/15/06. . . . . . . . . . . . 530
IRON & STEEL - 0.7%
500 ++Armco, Inc. (144A)
9.00%, due 9/15/07
(acquired 9/12/97). . . . . . . . . . . . . 486
LEISURE TIME - 5.7%
1,000 AMC Entertainment, Inc.
9.50%, due 3/15/09. . . . . . . . . . . . 1,037
919 AMF Bowling WW (Series B)
12.25%, due 3/15/01 Step Bond . . . . . . . 723
500 Cinemark USA, Inc. (Series B)
9.625%, due 8/01/08 . . . . . . . . . . . . 519
500 (Series D)
9.625%, due 8/01/08 . . . . . . . . . . . . 519
1,250 Speedway Motorsports, Inc.
8.50%, due 8/15/07. . . . . . . . . . . . 1,275
MANUFACTURING - DIVERSIFIED - 1.5%
1,000 Plastic Specialties and
Technologies, Inc.
11.25%, due 12/01/03. . . . . . . . . . . 1,090
MANUFACTURING - SPECIALIZED - 0.7%
500 ++Flextronics International, Ltd. (144A)
8.75%, due 10/15/07
(acquired 10/09/97) . . . . . . . . . . . . 496
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-6-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -------------------------------------------------------------
<S> <C>
METALS - 3.0%
$1,000 Commonwealth Aluminum Corp.
10.75%, due 10/01/06. . . . . . . . . . .$1,073
1,000 Wells Aluminum Corp. (Series B)
10.125%, due 6/01/05. . . . . . . . . . . 1,060
OFFICE EQUIPMENT & SUPPLIES - 1.5%
1,200 Corporate Express, Inc.
4.50%, due 7/01/00
Convertible . . . . . . . . . . . . . . . 1,061
OIL SERVICES - 1.8%
500 ICO, Inc. (Series B)
10.375%, due 6/01/07. . . . . . . . . . . . 536
750 ++Newpark Resources, Inc. (144A)
8.625%, due 12/15/07
(acquired 12/10/97) . . . . . . . . . . . . 762
PAPER & FOREST PRODUCTS - 1.4%
500 Specialty Paperboard, Inc.
9.375%, due 10/15/06. . . . . . . . . . . . 520
500 The Fonda Group (Series B)
9.50%, due 3/01/07. . . . . . . . . . . . . 470
POWER PRODUCER - 1.4%
1,000 AES Corp.
8.50%, due 11/01/07 . . . . . . . . . . . 1,000
REFINING - 2.2%
500 Crown Central Petroleum Corp.
10.875%, due 2/01/05. . . . . . . . . . . . 530
1,000 ++United Refining Co. (144A)
10.75%, due 6/15/07
(acquired 6/09/97). . . . . . . . . . . . 1,050
RESTAURANTS - 2.9%
1,000 Apple South, Inc.
9.75%, due 6/01/06. . . . . . . . . . . . 1,045
1,000 ++Perkins Family Restaurants (144A)
10.125%, due 12/15/07
(acquired 12/17/97) . . . . . . . . . . . 1,013
RETAIL - 0.7%
$ 500 K-Mart Corp.
7.95%, due 2/01/23. . . . . . . . . . . .$ 479
RETAIL - DEPARTMENT STORES - 1.8%
1,250 Specialty Retailers, Inc.
9.00%, due 7/15/07. . . . . . . . . . . . 1,275
RETAIL - FOOD CHAINS - 1.8%
1,250 Jitney-Jungle Stores of
America, Inc.
10.375%, due 9/15/07. . . . . . . . . . . 1,297
RETAIL - SPECIALTY - 1.7%
$1,250 ++Big 5 Corp. (144A)
10.875%, due 11/15/07
(acquired 11/07/97) . . . . . . . . . . . 1,244
SAVINGS & LOAN - SAVINGS BANK - 0.8%
500 ++First Nationwide
Holdings, Inc. (144A)
10.625%, due 10/01/03
(acquired 9/13/96). . . . . . . . . . . . . 560
SERVICES - COMMERCIAL & CONSUMER - 0.7%
500 Unicco Service Co.
9.875%, due 10/15/07. . . . . . . . . . . . 498
TELECOMMUNICATIONS - 5.7%
1,000 Paging Network, Inc.
10.00%, due 10/15/08. . . . . . . . . . . 1,036
1,250 PhoneTel Technologies
12.00%, due 12/15/06. . . . . . . . . . . 1,297
2,000 ++Qwest Communications
International, Inc. (144A)
9.47%, due 10/15/02 Step Bond
(acquired 10/09/97) . . . . . . . . . . . 1,350
500 ++Telegroup, Inc. (144A)
10.50%, due 5/1/00 Step Bond
(acquired 10/20/97) . . . . . . . . . . . . 388
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-7-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO HIGH-YIELD BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- -------------------------------------------------------------
<S> <C>
TELEPHONE - 1.8%
$1,250 GCI, Inc.
9.75%, due 8/01/07. . . . . . . . . . . .$1,297
TEXTILES - 1.8%
1,250 Dyersburg Corp.
9.75%, due 9/07/07. . . . . . . . . . . . 1,306
TEXTILES - HOME FURNISHINGS - 1.4%
1,000 ++Maxim Group, Inc. (144A)
9.25%, due 10/15/07
(acquired 12/01/97) . . . . . . . . . . . . 993
TEXTILES - SPECIALTY - 1.4%
1,000 Polymer Group, Inc. (Series B)
9.00%, due 7/01/07. . . . . . . . . . . . . 998
TRANSPORTATION - 1.4%
1,000 International Shipholding Corp.
9.00%, due 7/01/03. . . . . . . . . . . . 1,025
TRUCKERS - 1.8%
1,250 Allied Holdings, Inc.
8.625%, due 10/01/07. . . . . . . . . . . 1,278
UTILITIES - 0.5%
314 Midland Cogeneration
Venture, L.P.
10.33%, due 7/23/02 . . . . . . . . . . . . 338
-------
TOTAL CORPORATE BONDS. . . . . . . . . . . . . . . . .65,892
------
</TABLE>
<TABLE>
SHARES OR
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- ------------------------------------------------------------
<S> <C>
PREFERRED STOCK - 3.7%
BROADCAST MEDIA - 2.5%
5 American Radio
Systems Corp. . . . . . . . . . . . . . $ 626
5 SFX Broadcasting, Inc.. . . . . . . . . . . 606
5 Sinclair Broadcast
Group, Inc. . . . . . . . . . . . . . . . . 552
RAILROADS - 1.2%
500 SFP Pipeline
Partners L.P. . . . . . . . . . . . . . . . 845
-------
TOTAL PREFERRED STOCK. . . . . . . . . . . . . . . . . 2,629
-------
TEMPORARY INVESTMENTS - 1.8%
INVESTMENT COMPANIES:
$1,294 SSgA Prime Money
Market Portfolio. . . . . . . . . . . . . 1,294
-------
TOTAL TEMPORARY INVESTMENTS. . . . . . . . . . . . . . 1,294
-------
TOTAL INVESTMENTS - 97.4%. . . . . . . . . . . . . . .69,815
Other Assets, less Liabilities . . . . . . . . . . . . 1,857
-------
NET ASSETS . . . . . . . . . . . . . . . . . . . $71,672
-------
-------
</TABLE>
- --------------------------------------------------------------------------------
++ Securities are exempt from registration and restricted as to resale only to
dealers, or through a dealer to an "accredited investor" or a "qualified
institutional buyer." The total value of such securities is $14,546,438 and
the total value is 20.3% of net assets.
SEE NOTES TO FINANCIAL STATEMENTS
-8-
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO GNMA FUND
December 31, 1997
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
PAUL STEVENSON
For the year ended December 31, 1997, the SAFECO GNMA Fund returned 8.97%,
outperforming its Morningstar peer group at 8.49%, placing 42 out of 120 funds.
For the quarter ended the same date, the Fund returned 2.18% versus 2.23%, for
the Morningstar peer group. Meanwhile, the Merrill Lynch GNMA Mortgage Index
returned 9.54% for the year, and 2.25% during the quarter.
The Fund outperformed its peer group for the year by holding longer-term
bonds, yet waned in the last quarter as our "seasoned" paper (higher-yielding
GNMAs that have survived several waves of refinancing and are less likely to
be called) lost ground to other mortgage securities, such as FNMA and FHLMC,
which the Fund holds less of. Our under-performance of the index is due to
the makeup of the index itself. Unlike your Fund, an index is a paper
portfolio that has no fees, no call features, and no transaction expenses.
Given these advantages, few bond funds beat their respective index.
The fourth quarter of 1997 was very good to bond investors as the bond
rally continued to roll on. Even though the U.S. economy continued to show
surprising strength so late in an
<TABLE>
<CAPTION>
PERFORMANCE OVERVIEW - NO-LOAD CLASS
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIODS ENDED DECEMBER 31, 1997
<S> <C>
1 Year 8.97%
5 Year 6.05%
10 Year 8.08%
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT
VALUE
SAFECO MERRILL
GNMA LYNCH
FUND: GNMA INDEX:
$21,746 $25,475
----------------------------------------------------
<S> <C> <C>
12/31/87 10,000 10,000
01/31/88 10,194 10,441
02/28/88 10,279 10,562
03/31/88 10,248 10,463
04/30/88 10,271 10,392
05/31/88 10,187 10,354
06/30/88 10,394 10,649
07/31/88 10,383 10,609
08/31/88 10,394 10,616
09/30/88 10,567 10,881
10/31/88 10,850 11,145
11/30/88 10,792 10,974
12/31/88 10,781 10,924
01/31/89 10,894 11,113
02/28/89 10,862 11,035
03/31/89 10,872 11,038
04/30/89 11,053 11,250
05/31/89 11,332 11,597
06/30/89 11,608 11,957
07/31/89 11,861 12,169
08/31/89 11,703 12,019
09/30/89 11,757 12,071
10/31/89 11,969 12,379
11/30/89 12,100 12,527
12/31/89 12,174 12,601
01/31/90 12,039 12,469
02/28/90 12,094 12,581
03/31/90 12,109 12,597
04/30/90 11,942 12,478
05/31/90 12,308 12,876
06/30/90 12,473 13,087
07/31/90 12,701 13,308
08/31/90 12,588 13,415
09/30/90 12,671 13,537
10/31/90 12,778 13,703
11/30/90 13,062 14,007
12/31/90 13,234 14,240
01/31/91 13,422 14,444
02/28/91 13,500 14,545
03/31/91 13,570 14,656
04/30/91 13,717 14,801
05/31/91 13,826 14,920
06/30/91 13,842 14,942
07/31/91 14,062 15,193
08/31/91 14,288 15,479
09/30/91 14,536 15,758
10/31/91 14,751 16,007
11/30/91 14,825 16,117
12/31/91 15,194 16,516
01/31/92 14,983 16,316
02/28/92 15,105 16,478
03/31/92 15,018 16,374
04/30/92 15,129 16,548
05/31/92 15,422 16,854
06/30/92 15,585 17,117
07/31/92 15,808 17,217
08/31/92 15,970 17,470
09/30/92 16,099 17,600
10/31/92 15,933 17,465
11/30/92 16,001 17,554
12/31/92 16,212 17,770
01/31/93 16,451 18,004
02/28/93 16,631 18,171
03/31/93 16,697 18,283
04/30/93 16,755 18,383
05/31/93 16,804 18,480
06/30/93 17,087 18,655
07/31/93 17,157 18,744
08/31/93 17,338 18,781
09/30/93 17,357 18,791
10/31/93 17,386 18,848
11/30/93 17,220 18,855
12/31/93 17,359 19,042
01/31/94 17,553 19,192
02/28/94 17,287 19,101
03/31/94 16,738 18,605
04/30/94 16,593 18,468
05/31/94 16,649 18,506
06/30/94 16,575 18,467
07/31/94 16,895 18,831
08/31/94 16,933 18,882
09/30/94 16,678 18,671
10/31/94 16,635 18,658
11/30/94 16,490 18,611
12/31/94 16,618 18,810
01/31/95 16,959 19,216
02/28/95 17,356 19,730
03/31/95 17,414 19,827
04/30/95 17,637 20,109
05/31/95 18,123 20,709
06/30/95 18,200 20,845
07/31/95 18,221 20,897
08/31/95 18,418 21,120
09/30/95 18,595 21,339
10/31/95 18,739 21,517
11/30/95 18,959 21,751
12/31/95 19,191 22,029
01/31/96 19,318 22,197
02/28/96 19,057 22,021
03/31/96 18,945 21,992
04/30/96 18,869 21,921
05/31/96 18,827 21,838
06/30/96 19,086 22,086
07/31/96 19,114 22,185
08/31/96 19,111 22,216
09/30/96 19,428 22,574
10/31/96 19,786 23,027
11/30/96 20,080 23,379
12/31/96 19,955 23,257
01/31/97 20,084 23,420
02/28/97 20,129 23,509
03/31/97 19,915 23,288
04/30/97 20,243 23,659
05/31/97 20,417 23,909
06/30/97 20,665 24,188
07/31/97 21,107 24,624
08/31/97 21,031 24,593
09/30/97 21,282 24,911
10/31/97 21,504 25,163
11/30/97 21,539 25,229
12/31/97 21,746 25,475
</TABLE>
The performance graph compares a hypothetical $10,000 investment in the Fund to
a hypothetical investment in a relevant market index. The index is unmanaged and
includes no operating expenses or transaction costs. Past performance is not
predictive of future results. Principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
-9-
<PAGE>
- --------------------------------------------------------------------------------
REPORT FROM THE GNMA FUND MANAGER
economic cycle (going on seven years), bond investors found much to feel good
about. Fears of an over-heated economy (likely leading to a pickup in inflation
and possible Fed tightening) were quelled by favorable news on many fronts.
Anticipated inflationary pressures never surfaced -- the Consumer Price Index
(CPI) came in at only 1.7% for the year.
On the demand side, it appears some investors have started shifting funds
out of the equity markets into the fixed-income markets, seriously wondering
whether the stock market could soar one more year, having done so for four years
running. Also, as the Asian financial drama unfolded, foreign investors, looking
for a safe haven, stepped up their purchases of U.S. Treasury securities. Both
trends have led to lower U.S. rates.
Many economists believe the U.S. will experience a slight economic
slowdown, and our strong currency will lead to cheaper import prices. So in
summary, bond investors are having it their way for a change, and I believe the
markets will continue to treat bonds favorably.
As can be expected during a sustained bond market rally, non-callable
securities fared better than their callable brethren, with longer maturity bonds
doing particularly well. Generally 30-year pass-through securities outperformed
15- and five- to seven-year securities. Similarly, mortgage securities which
were backed by residential loans and less likely to be refinanced (lower note
rate or "discounts") generated better returns as investors were more confident
of not having their investment called away early. Bear Stearns currently
estimates that over 60% of the fixed-rate mortgage market is subject to
refinancing. (Because mortgages are callable, investors risk having to reinvest
their called mortgage security money at lower, current rates. Mortgage
securities will have to be offered at greater yields relative to noncallable
alternatives to keep up the demand. I expect mortgage-backed securities will
perform similarly to other fixed-income sectors if the bond market continues to
rally, yet outperform if rates rise.)
I continue to keep the emphasis of the portfolio in 30-year pass-through
securities (approximately 85%-95%), and the balance in either
<TABLE>
<CAPTION>
- ----------------------------------------------
HIGHLIGHTS
- ----------------------------------------------
<S> <C>
CURRENT YIELD (30-DAY) . . . . . . . . . 6.34%
WEIGHTED AVERAGE MATURITY. . . . . .25.2 YEARS
- ----------------------------------------------
</TABLE>
-10-
<PAGE>
- --------------------------------------------------------------------------------
REPORT FROM THE GNMA FUND MANAGER
well-structured agency CMOs or U.S. Treasuries. Cash is kept to a minimum, at
just enough to handle the daily fluctuations. At quarter-end, the SAFECO GNMA
Fund's duration (sensitivity to interest rates) and weighted average life
were 3.6 and 6.2 years, versus 2.3 and 6 years for the Lehman Brothers GNMA
Mortgage Index.
The Fund will continue to reflect my investment style of seeking base hits,
rather than going for the spectacular-- and rare -- home run. I will maintain
the Fund's basic portfolio characteristics with four goals in mind: First, the
portfolio will generally reflect the characteristics of its peer group. Second,
I will also try to identify the right sectors to be in. Third, I will conduct
opportunistic trading, and fourth, will adjust the duration within reasonable
limits to match our interest rate and prepayment outlook.
Paul Stevenson
- --------------------------------------------------------------------------------
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.
PORTFOLIO OF INVESTMENTS
SAFECO
GNMA FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) . . . . . . . . . . . . . . . . VALUE (000'S)
- ------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND
AGENCY SECURITIES -97.5%
COLLATERIZED MORTGAGE OBLIGATION (CMO) - 10.7%
$12,000 7.00%, FNMA REMIC
1993-226 PH PAC
due 5/25/22 . . . . . . . . . . . . . . $31,874
1,263 6.50%, FNMA REMIC
1993-119 H PAC
due 7/25/23 . . . . . . . . . . . . . . . 1,256
1,000 6.00%, FNMA REMIC
1993-191 C PAC
due 10/25/08. . . . . . . . . . . . . . . . 974
FEDERAL HOME LOAN MORTGAGE
CORP. (FHLMC) - 2.7%
987 7.50%, due 11/01/19 . . . . . . . . . . . 1,019
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA) - 10.3%
3,967 6.50%, due 8/01/23-10/01/23 . . . . . . . 3,948
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA) - 73.8%
1,273 9.50%, due 3/15/20. . . . . . . . . . . . 1,386
4,537 8.50%, due 11/15/24 . . . . . . . . . . . 4,797
2,755 8.00%, due 6/15/21-12/15/22 . . . . . . . 2,872
10,980 7.50%, due 1/15/22-4/20/23. . . . . . . .11,300
5,604 7.00%, due 10/20/24-3/20/26 . . . . . . . 5,633
2,203 6.50%, due 11/20/25-3/20/26 . . . . . . . 2,171
--------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES. . . . . .37,230
--------
TEMPORARY INVESTMENTS - 0.0%
INVESTMENT COMPANIES:
4 SSgA Prime Money
Market Portfolio. . . . . . . . . . . . . . . 4
--------
TOTAL TEMPORARY INVESTMENTS. . . . . . . . . . . . . . . . 4
--------
TOTAL INVESTMENTS - 97.5%. . . . . . . . . . . . . . .37,234
--------
Other Assets, less Liabilities . . . . . . . . . . . . . 938
--------
NET ASSETS . . . . . . . . . . . . . . . . . . . . $38,172
--------
--------
- ------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-11-
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO INTERMEDIATE-TERM
U.S. TREASURY FUND
December 31, 1997
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
RONALD SPAULDING
The SAFECO Intermediate-Term U.S. Treasury Fund outperformed its index and
peer group for the year and six-month period ended December 31, 1997. For the
year, your Fund returned 8.29% versus 7.76% for the Merrill Lynch index and
8.11% for the average fund reported by Lipper Analytical Services. For the six
months, the Fund returned 6.17%, while the Merrill Lynch index of U.S.
Treasuries, 1-10 Years returned 4.88%, and the average intermediate U.S.
Treasury mutual fund--as reported by Lipper Analytical Services--returned 5.82%.
Surprisingly low price inflation in the face of a strong economy and low
unemployment rate drove bond prices higher through the last eight months of the
year. The economic and financial turmoil in Asia in the second half of the year
added impetus to the upward move as investors sought refuge in the safety of
U.S. Treasury bonds. Also investors reckoned that weakness in the Asian
economies and currencies would slow domestic growth and price inflation, making
prospects for bonds positive into the new year.
We beat the index and peer group by positioning the average maturity
of the Fund to take advantage of the economic environment. As longer maturities
will perform better in a declining rate environment, we decided at mid-year we
wanted to position the average maturity of the
<TABLE>
<CAPTION>
PERFORMANCE OVERVIEW - NO-LOAD CLASS
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIODS ENDED DECEMBER 31, 1997
<S> <C>
1-YEAR 8.29%
5-YEAR 6.28%
SINCE INCEPTION* 7.56%
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT
VALUE
SAFECO
INTERMEDIATE MERRILL
TERM U.S. LYNCH
TREASURY FUND: TERM TREASURY
$19,631 INDEX: $20,619
------------------------------------------------------
<S> <C> <C>
09/30/88 10,000 10,000
10/31/88 10,192 10,136
11/30/88 10,113 10,048
12/31/88 10,125 10,057
01/31/89 10,185 10,156
02/28/89 10,133 10,114
03/31/89 10,151 10,164
04/30/89 10,330 10,351
05/31/89 10,511 10,569
06/30/89 10,751 10,839
07/31/89 10,939 11,060
08/31/89 10,837 10,906
09/30/89 10,882 10,961
10/31/89 11,065 11,186
11/30/89 11,146 11,295
12/31/89 11,169 11,324
01/31/90 11,102 11,259
02/28/90 11,158 11,288
03/31/90 11,152 11,310
04/30/90 11,123 11,270
05/31/90 11,334 11,509
06/30/90 11,449 11,658
07/31/90 11,603 11,826
08/31/90 11,561 11,774
09/30/90 11,606 11,882
10/31/90 11,699 12,047
11/30/90 11,820 12,227
12/31/90 11,968 12,400
01/31/91 12,022 12,526
02/28/91 12,116 12,591
03/31/91 12,202 12,660
04/30/91 12,337 12,791
05/31/91 12,402 12,864
06/30/91 12,417 12,877
07/31/91 12,572 13,016
08/31/91 12,783 13,259
09/30/91 12,976 13,485
10/31/91 13,115 13,637
11/30/91 13,250 13,797
12/31/91 13,586 14,134
01/31/92 13,431 13,991
02/28/92 13,448 14,044
03/31/92 13,399 13,987
04/30/92 13,501 14,115
05/31/92 13,695 14,316
06/30/92 13,909 14,524
07/31/92 14,256 14,793
08/31/92 14,367 14,964
09/30/92 14,634 15,171
10/31/92 14,366 14,985
11/30/92 14,277 14,918
12/31/92 14,478 15,115
01/31/93 14,851 15,397
02/28/93 15,179 15,628
03/31/93 15,241 15,686
04/30/93 15,350 15,810
05/31/93 15,299 15,763
06/30/93 15,670 15,990
07/31/93 15,694 16,022
08/31/93 16,081 16,267
09/30/93 16,172 16,337
10/31/93 16,208 16,366
11/30/93 15,948 16,287
12/31/93 16,048 16,351
01/31/94 16,256 16,514
02/28/94 15,826 16,279
03/31/94 15,493 16,051
04/30/94 15,383 15,942
05/31/94 15,390 15,959
06/30/94 15,361 15,970
07/31/94 15,564 16,168
08/31/94 15,604 16,219
09/30/94 15,434 16,088
10/31/94 15,440 16,092
11/30/94 15,408 16,012
12/31/94 15,468 16,072
01/31/95 15,645 16,339
02/28/95 15,879 16,652
03/31/95 15,960 16,743
04/30/95 16,157 16,935
05/31/95 16,774 17,419
06/30/95 16,886 17,533
07/31/95 16,755 17,545
08/31/95 16,955 17,689
09/30/95 17,142 17,808
10/31/95 17,403 18,008
11/30/95 17,757 18,232
12/31/95 18,059 18,418
01/31/96 18,117 18,576
02/28/96 17,676 18,368
03/31/96 17,490 18,280
04/30/96 17,454 18,222
05/31/96 17,451 18,212
06/30/96 17,577 18,390
07/31/96 17,632 18,447
08/31/96 17,631 18,467
09/30/96 17,828 18,701
10/31/96 18,047 19,006
11/30/96 18,279 19,240
12/31/96 18,128 19,135
01/31/97 18,184 19,206
02/28/97 18,136 19,227
03/31/97 17,915 19,129
04/30/97 18,167 19,343
05/31/97 18,307 19,492
06/30/97 18,489 19,660
07/31/97 19,022 20,029
08/31/97 18,793 19,944
09/30/97 19,075 20,164
10/31/97 19,410 20,398
11/30/97 19,419 20,445
12/31/97 19,631 20,619
</TABLE>
* The Fund's inception was September 7, 1988. Graph and average annual return
comparison begins September 30, 1988.
The performance graph compares a hypothetical $10,000 investment in the Fund to
a hypothetical investment in a relevant market index. The index is unmanaged and
includes no operating expenses or transaction costs. Past performance is not
predictive of future results. Principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
-12-
<PAGE>
- --------------------------------------------------------------------------------
REPORT FROM THE FUND MANAGER
Fund significantly longer than our benchmark index. At mid-year we
lengthened the maturity of the fund. As the year progressed we took care to
remain fully invested to take advantage of rising bond prices. For this time
period the strategy served us well.
At year end the average maturity of the Fund was 6.0 years compared to 3.8
years for the Merrill Lynch index of U.S. Treasuries, 1-10 Years. Eighteen per
cent of net assets were invested in U.S. Government agencies. The balance was
invested in U.S. Treasuries and a small cash position.
Bond prices at year end incorporate all the good news on the economic and
inflation front as well as a very optimistic view of 1998. While we, too, are
optimistic about 1998, we don't expect bond prices to improve significantly from
these levels. We expect bonds to earn their coupon this year while other
financial assets may struggle to earn similar returns. As the new year begins,
we plan to keep the average maturity longer than the benchmark index. If the
economic and inflation environment begins to deteriorate, we will shorten the
maturity of the portfolio.
Ronald Spaulding
- --------------------------------------------------------------------------------
Ronald Spaulding is the chief investment officer of SAFECO Corporation. In 1995,
he became vice president and treasurer of SAFECO Corporation, director of the
insurance subsidiaries, vice chairman of SAFECO Asset Management Company, and
vice president and treasurer of SAFECO Mutual Funds. He holds an M.B.A. from the
University of Washington and is a chartered financial analyst.
PORTFOLIO OF INVESTMENTS
SAFECO INTERMEDIATE-TERM
U.S. TREASURY FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- ------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES - 97.0%
U.S. FEDERAL AGENCY NOTES - 18.5%
$1,500 6.88%, due 11/22/06 . . . . . . . . . .$ 1,526
1,500 6.26%, due 9/24/04. . . . . . . . . . . . 1,521
U.S. TREASURY NOTES - 71.5%
2,450 7.75%, due 2/15/01 . . . . . . . . . . . 2,592
1,200 7.50%, due 11/15/01 . . . . . . . . . . . 1,273
2,070 7.25%, due 8/15/04 . . . . . . . . . . . 2,238
1,560 6.88%, due 3/31/00 . . . . . . . . . . . 1,599
3,900 6.50%, due 10/15/06 . . . . . . . . . . . 4,084
U.S. TREASURY PRINCIPAL STRIPS - 7.0%
1,975 0.00%, due 2/15/07 . . . . . . . . . . . 1,162
--------
TOTAL U.S. GOVERNMENT SECURITIES . . . . . . . . . . .15,995
--------
TEMPORARY INVESTMENTS - 4.7%
INVESTMENT COMPANIES:
$782 SSgA Prime Money
Market Portfolio . . . . . . . . . . .$ 782
--------
TOTAL TEMPORARY INVESTMENTS. . . . . . . . . . . . . . . 782
--------
TOTAL INVESTMENTS - 101.7% . . . . . . . . . . . . . .16,777
--------
Liabilities, less other Assets . . . . . . . . . . . . (282)
--------
NET ASSETS . . . . . . . . . . . . . . . . . . . . $16,495
--------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
HIGHLIGHTS
- ------------------------------------------------------------
<S> <C>
CURRENT YIELD (30-DAY) . . . . . . . . . . . . . . . . 5.04%
WEIGHTED AVERAGE MATURITY. . . . . . . . . . . . . 6.0 YEARS
- ------------------------------------------------------------
</TABLE>
-13-
<PAGE>
REPORT FROM THE FUND MANAGER
SAFECO MANAGED BOND FUND
December 31, 1997
- --------------------------------------------------------------------------------
[PHOTOGRAPH]
MIKE HUGHES
The Managed Bond Fund returned 8.23% for the year, and 2.94% for the
quarter ended December 31, 1997, in line with its peer group of funds and behind
the broad market. The average corporate bond fund delivered 8.65% for the year,
and 2.24% for the quarter, as measured by Morningstar. The Lehman Brothers
Government/Corporate Index, returned 9.76% for the year, and 3.22% for the
quarter.
The Fund gained ground against the peer group during the fourth quarter due
to its substantial holding of U.S. Treasury securities, as Asian-market
difficulties produced a "flight to quality" bid for U.S. Treasuries, causing
corporate bonds and mortgage-backed securities to lag. Underperformance relative
to the Lehman Brothers Government/Corporate Index can be attributed to the
nature of the index itself. An index is a "portfolio on paper," it has no cash,
and incurs no transaction costs or fees. Additionally, the index has no maturity
restrictions, while the Fund is currently constrained to investing in securities
with maturities of ten years or less.
I took over the management responsibilities of the Managed Bond Fund during
February 1997. Like my predecessor, I intend to emphasize high-quality
intermediate-term securities in the portfolio. However, unlike my predecessor,
my strategy will not rely on large swings in duration (lengthening or shortening
the average maturity date of the Fund's bond portfolio, in anticipation of their
sensitivity to interest rates) to distinguish this Fund from its peer group.
In the past, Fund performance was heavily dependent on the duration
decision. The Fund suffered when its portfolio had a duration that was either
too long or too short and interest rates suddenly changed course. The duration
of your Fund will not fluctuate as widely as it had in the past. I plan to keep
the portfolio duration within plus or minus 15% of the benchmark index's
duration. While duration will remain an important factor in my investment
strategy, equally important will be sector positioning, credit
-14-
<PAGE>
- --------------------------------------------------------------------------------
S&P CREDIT RATING DISTRIBUTION
AS A PERCENT OF NET ASSETS
------------------------------
[CHART]
1 AAA: 76%
2 A: 20%
3 BBB: 2%
4 Cash & Other: 2%
selection, and maturity structure within the portfolio. To the extent the
prospectus allows, the Fund will consider utilizing mortgage-backed securities,
triple-B rated corporate bonds, and securities with maturities longer than ten
years.
During the last quarter of the year, the Fund liquidated some of its
U.S. Treasury holdings in order to take advantage of the softness in the
corporate and mortgage-backed securities sectors of the market. At year end,
the Fund held 52% of its assets in U.S. Treasury obligations, 27% in
high-grade corporate bonds, 12% in mortgage-backed securities, 7% in AAA
rated asset-backed securities, and 2% cash. The portfolio's effective
duration was 6.2 years on December 31, 1997, slightly longer than the
duration of the Lehman Brothers Intermediate Government/Corporate Bond Index
at 5.3 years.
The fundamentals behind bond bullishness remain intact. Inflation is under
wraps and even falling. Meanwhile, the dollar is strong, encouraging foreign
investors to buy U.S. bonds. Leading commodity prices are dropping, signaling
that the benign inflationary environment
<TABLE>
<CAPTION>
MANAGED BOND FUND
PERFORMANCE OVERVIEW -- NO LOAD CLASS
AVERAGE ANNUAL TOTAL RETURN FOR THE
PERIODS ENDED DECEMBER 31, 1997
-----------------------------------
<S> <C>
1-Year 8.23%
Since Inception* 5.59%
</TABLE>
[GRAPH]
<TABLE>
<CAPTION>
INVESTMENT
VALUE
SAFECO
MANAGED BOND LEHMAN BROTHERS
FUND: GOV'/CORP. INDEX:
$12,321 $13,088
------------------------------------------------------
<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
01/31/97 11,407 11,939
02/28/97 11,383 11,964
03/31/97 11,236 11,822
04/30/97 11,380 11,994
05/31/97 11,469 12,106
06/30/97 11,601 12,251
07/31/97 11,942 12,626
08/31/97 11,777 12,484
09/30/97 11,968 12,680
10/31/97 12,161 12,883
11/30/97 12,180 12,952
12/31/97 12,321 13,088
</TABLE>
* The Fund's inception was June 25, 1992. Graph and average annual return
comparison begins February 28, 1994 (initial public offering).
The performance graph compares a hypothetical $10,000 investment in the Fund to
a hypothetical investment in a relevant market index. The index is unmanaged and
includes no operating expenses or transaction costs. Past performance is not
predictive of future results. Principal value may fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
-15-
<PAGE>
- --------------------------------------------------------------------------------
REPORT FROM THE FUND MANAGER
will likely continue. Still, bonds have come a long way, and will have great
difficulty matching 1997 gains--unless the Asia crisis substantially impacts the
U.S. economy.
Michael Hughes
- --------------------------------------------------------------------------------
Mike Hughes joined SAFECO as portfolio manager in January 1997. He began his
investment career in 1983. He graduated magna cum laude with a B.S. in finance
from the University of Colorado in Boulder and holds an M.B.A. from the
University of Southern California in Los Angeles. He is a Chartered Financial
Analyst.
<TABLE>
<CAPTION>
- ------------------------------------------------
HIGHLIGHTS
- ------------------------------------------------
PERCENT OF
BONDS BY TYPE NET ASSETS
- ------------------------------------------------
<S> <C>
U.S. Treasury Securities . . . . . . . . . . 52%
Asset-Backed Securities. . . . . . . . . . . 19%
Corporate Bonds. . . . . . . . . . . . . . . 27%
Cash and Other . . . . . . . . . . . . . . . .2%
-----
100%
-----
-----
- ------------------------------------------------
CURRENT YIELD (30-day) . . . . . . . . . . 5.27%
WEIGHTED AVERAGE MATURITY. . . . . . . 7.6 YEARS
- ------------------------------------------------
</TABLE>
PORTFOLIO OF INVESTMENTS
SAFECO MANAGED BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000'S) VALUE (000'S)
- ------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES - 19.5%
COLLATERIZED MORTGAGE
OBLIGATION (CMO) - 10.4%
$150 FHLMC REMIC 1587
6.50%, due 10/15/08 . . . . . . . . . . . .$150
150 FNMA REMIC 1993-11
7.35%, due 6/25/07. . . . . . . . . . . . . 155
200 FNMA REMIC 1993-55
6.50%, due 2/25/05. . . . . . . . . . . . . 202
CONSUMER - FINANCE - 4.6%
138 AFG Receivables Trust
6.20%, due 2/15/03. . . . . . . . . . . . . 138
90 Premier Auto Trust
6.20%, due 1/06/01. . . . . . . . . . . . . .90
FINANCIAL - DIVERSIFIED - 1.7%
80 FNMA (Class C)
6.74%, due 8/25/07. . . . . . . . . . . . . .83
FINANCIAL - MISCELLANEOUS - 1.1%
52 Chevy Chase Auto ABS
Series 1996-1 (Class A)
6.60%, due 12/15/02 . . . . . . . . . . . . .52
MANUFACTURING - SPECIALIZED - 1.7%
85 Harley Davidson Eagle
6.20%, due 1/15/03. . . . . . . . . . . . . .85
----
TOTAL ASSET-BACKED SECURITIES. . . . . . . . . . . . . . 955
----
CORPORATE BONDS - 27.3%
BANKS - MAJOR REGIONAL - 3.3%
150 Midland Bank
7.65%, due 5/01/25. . . . . . . . . . . . . 163
BUILDING MATERIALS - 1.5%
70 Hanson Overseas
6.75%, due 9/15/05. . . . . . . . . . . . . .72
</TABLE>
-16-
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
SAFECO MANAGED BOND FUND
As of December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT (000's) VALUE (000's)
- ------------------------------------------------------------
<S> <C> <C>
FINANCIAL - DIVERSIFIED - 13.2%
$150 Federal Home Loan
Mortgage Corp.
6.93%, due 3/21/07. . . . . . . . . . . .$ 159
110 Ford Motor Credit Co.
6.55%, due 9/10/02. . . . . . . . . . . . . 112
100 General Motors Acceptance Corp.
8.50%, due 1/01/03. . . . . . . . . . . . . 109
120 Hertz Corp. Notes
7.00%, due 7/01/04. . . . . . . . . . . . . 123
75 Morgan Stanley Notes
6.38%, due 8/01/02. . . . . . . . . . . . . .75
75 Student Loan Marketing
Association
6.38%, due 2/11/00. . . . . . . . . . . . . .75
FINANCIAL - MISCELLANEOUS - 2.4%
115 Smith Barney Holdings
6.63%, due 11/15/03 . . . . . . . . . . . . 116
INVESTMENT BANK/BROKERAGE - 5.3%
95 Donaldson, Lufkin & Jenrette, Inc.
6.90%, due 10/01/07 . . . . . . . . . . . . .97
160 Bear Stearns Cos., Inc.
6.75%, due 12/15/07 . . . . . . . . . . . . 161
RETAIL - GENERAL MERCHANDISE - 1.6%
75 Sears Roebuck Acceptance Corp.
6.75%, due 9/15/05. . . . . . . . . . . . . .76
------
TOTAL CORPORATE BONDS. . . . . . . . . . . . . . . . . 1,338
------
U.S. GOVERNMENT SECURITIES - 51.6%
U.S. TREASURY NOTES - 29.0%
475 7.25%, due 8/15/04. . . . . . . . . . . . . 513
205 6.50%, due 10/15/06 . . . . . . . . . . . . 215
460 6.38%, due 9/30/01. . . . . . . . . . . . . 470
220 5.75%, due 12/31/98 . . . . . . . . . . . . 220
------
U.S. TREASURY PRINCIPAL STRIP - 22.6%
1,875 0.00%, due 2/15/07. . . . . . . . . . . . 1,103
------
TOTAL U.S. GOVERNMENT SECURITIES . . . . . . . . . . . 2,521
------
TEMPORARY INVESTMENTS - 1.2%
INVESTMENT COMPANIES:
57 SSgA Prime Money
Market Portfolio. . . . . . . . . . . . . . .57
------
TOTAL TEMPORARY INVESTMENTS. . . . . . . . . . . . . . . .57
------
TOTAL INVESTMENTS - 99.6%. . . . . . . . . . . . . . . 4,871
Other Assets, less Liabilities . . . . . . . . . . . . . .22
------
NET ASSETS . . . . . . . . . . . . . . . . . . . . .$4,893
------
------
- ------------------------------------------------------------
</TABLE>
-17-
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 1997
<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 $67,388 $35,858 $16,357 $4,711
------- ------- ------- -------
------- ------- ------- -------
Investments, at Value $69,815 $37,234 $16,777 $4,871
Receivables
Investment Securities Sold $858 $1,282 $11 $--
Trust Shares Sold -- 3 -- --
Interest 1,425 229 260 54
Deferred Organization Expense -- -- -- 7
------- ------- ------- -------
Total Assets 72,098 38,748 17,048 4,932
LIABILITIES
Payables
Investment Securities Purchased 163 -- 451 --
Trust Shares Redeemed -- 228 33 --
Dividends 192 56 39 18
Investment Advisory Fees 42 22 8 2
Notes Payable -- 245 -- --
Organization Expense -- -- -- 7
Other 29 25 22 12
------- ------- ------- -------
Total Liabilities 426 576 553 39
------- ------- ------- -------
NET ASSETS $71,672 $38,172 $16,495 $4,893
------- ------- ------- -------
------- ------- ------- -------
- ----------------------------------------------------------------------------------------------------------
NO-LOAD CLASS:
Net Assets $71,058 $38,172 $15,698 $4,627
Trust Shares Outstanding 7,786 3,989 1,518 $538
------- ------- ------- -------
Net Asset Value, Offering Price and
Redemption Price Per Share $9.13 $9.57 $10.34 $8.60
------- ------- ------- -------
------- ------- ------- -------
CLASS A:
Net Assets $259 -- $365 $146
Trust Shares Outstanding 28 35 $17
------- ------- -------
Net Asset Value and Redemption
Price Per Share $9.12 $10.35 $8.60
------- ------- -------
------- ------- -------
Maximum Offering Price Per Share
(Net Asset Value Plus Sales
Charge of 4.5%) $9.55 $10.84 $9.01
------- ------- -------
------- ------- -------
CLASS B:
Net Assets $355 -- $432 $120
Trust Shares Outstanding 39 42 14
------- ------- -------
Net Asset Value and Offering
Price Per Share* $9.12 $10.35 $8.60
------- ------- -------
------- ------- -------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Redemption price per share is the net asset value less any applicable
contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
-18-
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<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 $5,637 $2,779 $1,034 $282
EXPENSES
Investment Advisory Fees 386 246 85 23
Transfer Agent Fees 86 65 31 1
Shareholder Services Fees-Class A -- -- 1 --
-Class B -- -- 1 --
Distribution Fees-Class B 1 -- 2 1
Legal and Auditing Fees 29 14 15 15
Custodian Fees 9 6 3 3
Reports to Shareholders 14 11 4 --
Trustees' Fees 4 4 4 4
Other Fees 11 8 2 2
Amortization of
Organization Expenses -- -- -- 6
------- ------- ------- -------
Total Expenses 540 354 148 55
------- ------- ------- -------
NET INVESTMENT INCOME 5,097 2,425 886 227
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net Realized Gain (Loss)
on Investments 954 411 (57) (21)
Net Change in Unrealized
Appreciation 1,194 437 416 163
------- ------- ------- -------
NET GAIN ON INVESTMENTS 2,148 848 359 142
------- ------- ------- -------
NET CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $7,245 $3,273 $1,245 $369
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-19-
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SAFECO HIGH-YIELD BOND FUND SAFECO GNMA FUND
-------------------------------------- ----------------------------------------
THREE- THREE-
FOR THE MONTH FOR THE FOR THE MONTH FOR THE
YEAR PERIOD YEAR YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31 DEC. 31 SEPT. 30 DEC. 31 DEC. 31 SEPT. 30
(In Thousands) 1997 1996 1996 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income $5,097 $1,092 $3,696 $2,425 $644 $2,711
Net Realized Gain (Loss) from
Investments 954 (426) 504 411 31 (416)
Net Change in Unrealized
Appreciation (Depreciation) 1,194 597 46 437 403 (453)
------- ------- ------- ------- ------- -------
Net Change in Net Assets
Resulting from Operations 7,245 1,263 4,246 3,273 1,078 1,842
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income
No-Load Class (5,073) (1,092) (3,696) (2,425) (644) (2,711)
Class A (11) -- -- -- -- --
Class B (13) -- -- -- -- --
NET REALIZED GAIN ON - No-Load Class
Investments -- -- -- -- -- --
------- ------- ------- ------- ------- -------
TOTAL (5,097) (1,092) (3,696) (2,425) (644) (2,711)
NET TRUST SHARE TRANSACTIONS
No-Load Class 18,821 2,247 8,152 (2,219) (594) (3,483)
Class A 155 -- -- -- -- --
Class B 250 -- -- -- -- --
------- ------- ------- ------- ------- -------
Total 19,226 2,247 8,152 (2,219) (594) (3,483)
------- ------- ------- ------- ------- -------
TOTAL CHANGE IN NET ASSETS 21,374 2,418 8,702 (1,371) (160) (4,352)
NET ASSETS AT BEGINNING OF PERIOD 50,298 47,880 39,178 39,543 39,703 44,055
------- ------- ------- ------- ------- -------
NET ASSETS AT END OF PERIOD $71,672 $50,298 $47,880 $38,172 $39,543 $39,703
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES AND AMOUNTS
SHARES:
Sales 12,626 1,190 6,549 872 107 694
Reinvestments 362 78 251 181 48 198
Redemptions (10,838) (1,013) (5,863) (1,290) (218) (1,267)
------- ------- ------- ------- ------- -------
NET CHANGE 2,150 255 937 (237) (63) 375
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
AMOUNTS:
Sales $112,308 $10,466 $56,960 $8,219 $1,008 $6,526
Reinvestments 3,238 690 2,181 1,705 447 1,858
Redemptions (96,320) (8,909) (50,989) (12,143) (2,049) (11,867)
------- ------- ------- ------- ------- -------
NET CHANGE $19,226 $2,247 $8,152 $(2,219) $(594) $(3,483)
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-20-
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SAFECO INTERMEDIATE-TERM SAFECO MANAGED
U.S. TREASURY FUND BOND FUND
------------------------------------- -------------------------
THREE-
FOR THE MONTH FOR THE FOR THE FOR THE
YEAR PERIOD YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DEC. 31 DEC. 31 SEPT. 30 DEC. 31 DEC. 31
(In Thousands) 1997 1996 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net Investment Income $886 $242 $758 $227 $208
Net Realized Gain (Loss) from
Investments (57) (125) 290 (21) 2
Net Change in Unrealized
Appreciation (Depreciation) 416 144 (496) 163 (210)
------- ------- ------- ------- -------
Net Change in Net Assets
Resulting from Operations 1,245 261 552 369 --
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income
No-Load Class (844) (232) (758) (216) (206)
Class A (30) (8) -- (7) (1)
Class B (12) (2) -- (4) (1)
NET REALIZED GAIN ON - No-Load Class
Investments -- -- -- -- (2)
------- ------- ------- ------- -------
TOTAL (886) (242) (758) (227) (210)
NET TRUST SHARE TRANSACTIONS
No-Load Class 674 189 900 280 (72)
Class A (346) 607 100 2 140
Class B 202 123 100 14 100
------- ------- ------- ------- -------
TOTAL 530 919 1,100 296 168
------- ------- ------- ------- -------
TOTAL CHANGE IN NET ASSETS 889 938 894 438 (42)
NET ASSETS AT BEGINNING OF PERIOD 15,606 14,668 13,774 4,455 4,497
------- ------- ------- ------- -------
NET ASSETS AT END OF PERIOD $16,495 $15,606 $14,668 $4,893 $4,455
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- ---------------------------------------------------------------------------------------------------------
OTHER INFORMATION
INCREASE (DECREASE) IN FUND SHARES AND AMOUNTS
SHARES:
Sales 1,062 149 1,516 439 30
Reinvestments 43 12 35 18 24
Redemptions (1,054) (70) (1,444) (422) (33)
------- ------- ------- ------- -------
NET CHANGE 51 91 107 35 21
------- ------- ------- ------- -------
------- ------- ------- ------- -------
AMOUNTS:
Sales $10,738 $1,515 $18,860 $3,703 $246
Reinvestments 434 117 358 152 201
Redemptions (10,642) (713) (18,118) (3,559) (279)
------- ------- ------- ------- -------
NET CHANGE $530 $919 $1,100 $296 $168
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-21-
<PAGE>
- --------------------------------------------------------------------------------
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.
Effective September 30, 1996, the Intermediate-Term U.S. Treasury Fund and
Managed Bond Fund began issuing two new classes of shares--Class A and Class B
shares (collectively, "Advisor Classes"). Effective January 31, 1997, the
High-Yield Bond Fund also began issuing Advisor Classes. Unlike the no-load
class of shares (which are sold directly to the shareholder with no associated
sales and distribution charges), these new classes of shares are sold by
financial advisors to shareholders and have associated sales and distribution
charges. Each class of shares represents an interest in the net assets of the
fund.
In connection with issuing the new Advisor Classes, the 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 selling its shares at the annual rate
of .25% of the average daily net assets of the Advisor Class. Class B shares
also pay the distributor a distribution fee at the annual rate of .75% of the
average daily net assets of the Class B shares.
Under the Plans, the distributor uses the service fees primarily to
compensate persons selling Advisor Class shares for providing ongoing services
and the maintenance of shareholder accounts. The distributor uses the
distribution fees primarily to offset the commissions it pays to financial
advisors for selling Class B shares.
2. SIGNIFICANT
ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by 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. Short-term investments purchased at par are
valued at cost. All other short-term investments are valued at amortized cost.
-22-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
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 continue 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.
<TABLE>
<CAPTION>
3. INVESTMENT TRANSACTIONS
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 YEAR
ENDED DECEMBER 31, 1997 $61,112 $30,592 $12,739 $8,230
------- ------- ------- -------
------- ------- ------- -------
SALES** FOR THE YEAR
ENDED DECEMBER 31, 1997 $43,803 $33,450 $12,518 $7,892
------- ------- ------- -------
------- ------- ------- -------
- -------------------------------------------------------------------------------
</TABLE>
* Excludes short-term securities. Purchases include $0, $30,592, $12,739, and
$6,474 of U.S. Government obligations for High-Yield, GNMA,
Intermediate-Term U.S. Treasury, and Managed Bond Funds, respectively.
** Excludes short-term securities. Sales include $0, $33,450, $12,518, and
$5,962 of U.S. Government obligations for High-Yield, GNMA,
Intermediate-Term U.S. Treasury, and Managed Bond Funds, respectively.
- -------------------------------------------------------------------------------
-23-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
4. COMPONENTS OF NET ASSETS
At December 31, 1997, 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 $2,638 $1,380 $442 $160
Aggregate gross unrealized depreciation
for investment securities in which
there is an excess of identified cost
over value (211) (4) (22) --
-------- -------- -------- --------
Net unrealized appreciation $2,427 $1,376 $420 $160
Accumulated net realized (loss) on
investment transactions* (339) (2,571) (253) (21)
Paid-in capital (par value $.001,
unlimited shares authorized) 69,584 39,367 16,328 4,754
-------- -------- -------- --------
Net Assets at December 31, 1997 $71,672 $38,172 $16,495 $4,893
-------- -------- -------- --------
-------- -------- -------- --------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*The above accumulated net realized losses on investment transactions represent
capital loss carryforwards for federal income tax purposes, which expire as
follows:
<TABLE>
<CAPTION>
AMOUNTS EXPIRATION DATES
<S> <C> <C>
High-Yield Bond Fund $ (339) 1998-2000
GNMA Fund (2,571) 1999-2003
Intermediate-Term U.S. Treasury Fund (253) 2001-2005
Managed Bond Fund (21) 2005
</TABLE>
5. SHAREHOLDER MEETING
On April 10, 1997, the High-Yield Bond Fund held a special meeting of
shareholders who voted to amend the Fund's fundamental investment policies to
exclude certain Rule 144A securities from the definition of securities which are
illiquid or subject to legal or contractual restrictions on resale. The results
of the vote are presented below.
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares For 3,649 74%
Shares Against 123 2%
Shares Abstain 126 2%
Broker Non-Vote 1,023 22%
- --------------------------------------------------------------------------------
</TABLE>
-24-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
6. 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>
<CAPTION>
<S> <C> <C> <C>
HIGH-YIELD & GNMA FUNDS: INTERMEDIATE-TERM U.S. TREASURY FUND
First $250 million .65% First $250 million .55%
Next $250 million .55 Next $250 million .45
Next $250 million .45 Next $250 million .35
Over $750 million .35 Over $750 million .25
MANAGED BOND FUND
First $100 million .50%
Next $150 million .40
Over $250 million .35
</TABLE>
TRANSFER AGENT FEES. SAFECO Services Corporation receives transfer agent
fees.
NOTES PAYABLE AND INTEREST EXPENSE. The Funds may borrow money for
temporary purposes from SAFECO Corporation or its affiliates. Interest rates
equivalent to commercial bank interest rates are charged on loans over $100,000.
No interest is charged on loans under $100,000. At December 31, 1997, the GNMA
Fund had a 5.68% note payable of $245,000 to SAFECO Life Insurance Company of
America. The note was repaid on January 9, 1998.
LINE OF CREDIT. The Trust, together with all other management investment
companies for which SAFECO Asset Management Company serves as investment
advisor, has a line of credit arrangement with certain financial institutions.
Under these arrangements, $75 million is available to meet short-term financing
needs. No balance was outstanding under these arrangements at December 31, 1997.
AFFILIATE OWNERSHIP. At December 31, 1997, SAFECO Corporation owned
500,000 shares (or 7%) of the High-Yield Bond Fund, SAFECO Insurance Company of
America owned 500,000 shares (or 31%) of the Intermediate-Term U.S. Treasury
Fund, and SAFECO Asset Management Company owned 452,103 shares (or 80%) of the
Managed Bond 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. These costs were advanced by the affiliates and are
being reimbursed by the Fund over the same time period.
DEALER CONCESSIONS. SAFECO Securities, Inc., retained the following amounts
in dealer commissions from sales of Class A Shares during the year ended
December 31, 1997:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED
- --------------------------------------------------------------------------------
<S> <C>
High-Yield Bond Fund $152
Intermediate-Term U.S. Treasury Fund $ 6
Managed Bond Fund $ 0
- --------------------------------------------------------------------------------
</TABLE>
-25-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO HIGH-YIELD BOND FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-
FOR THE MONTH
YEAR PERIOD
ENDED ENDED
DEC. 31 DEC. 31 FOR THE YEAR ENDED SEPTEMBER 30
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $8.82 $8.79 $8.68 $8.55 $9.22 $8.92
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.77 0.19 0.78 0.79 0.82 0.91
Net Realized and Unrealized
Gain (Loss) on Investments 0.31 0.03 0.11 0.13 (0.67) 0.30
------- ------- ------- ------- ------- -------
Total from Investment Operations 1.08 0.22 0.89 0.92 0.15 1.21
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.77) (0.19) (0.78) (0.79) (0.82) (0.91)
------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $9.13 $8.82 $8.79 $8.68 $8.55 $9.22
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL RETURN 12.79% 2.50%* 10.79% 11.43% 1.61% 14.29%
NET ASSETS AT END OF PERIOD (000'S) $71,058 $50,298 $47,880 $39,178 $27,212 $28,291
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.91% 0.90%** 0.94% 1.01% 1.03% 1.09%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 8.58% 8.56%** 8.99% 9.28% 9.26% 9.94%
PORTFOLIO TURNOVER RATE 85.06% 35.01%** 92.65% 38.03% 63.02% 50.27%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-26-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO HIGH-YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
ELEVEN- ELEVEN-
MONTH MONTH
PERIOD PERIOD
ENDED ENDED
DEC. 31 DEC. 31
1997 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.83 $ 8.83
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.69 0.63
Net Realized and Unrealized
Gain on Investments 0.29 0.29
Total from Investment Operations 0.98 0.92
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.69) (0.63)
------- -------
NET ASSET VALUE AT END OF PERIOD $ 9.12 $ 9.12
------- -------
------- -------
TOTAL RETURN+ 12.49%* 11.77%*
NET ASSETS AT END OF PERIOD (000'S) $259 $355
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.10%** 1.81%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 7.65%** 6.87%**
PORTFOLIO TURNOVER RATE 85.06%** 85.06%**
- --------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included,
the total return would have been lower.
-27-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO GNMA FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-
FOR THE MONTH
YEAR PERIOD
ENDED ENDED
DEC. 31 DEC. 31 FOR THE YEAR ENDED SEPTEMBER 30
------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $9.36 $9.26 $9.45 $9.05 $10.03 $9.95
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.60 0.15 0.60 0.60 0.60 0.67
Net Realized and Unrealized
Gain (Loss) on Investments 0.21 0.10 (0.19) 0.40 (0.98) 0.08
------- ------- ------- ------- ------- -------
Total from Investment Operations 0.81 0.25 0.41 1.00 (0.38) 0.75
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.60) (0.15) (0.60) (0.60) (0.60) (0.67)
------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $9.57 $9.36 $9.26 $9.45 $9.05 $10.03
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL RETURN 8.97% 2.71%* 4.48% 11.49% (3.91)% 7.81%
NET ASSETS AT END OF PERIOD (000'S) $38,172 $39,543 $39,703 $44,055 $46,176 $62,720
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.93% 1.01%** 1.03% 1.01% 0.95% 0.93%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 6.40% 6.43%** 6.42% 6.55% 6.26% 6.71%
PORTFOLIO TURNOVER RATE 82.70% 51.06%** 47.45% 131.24% 55.12% 70.96%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
-28-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
THREE-
FOR THE MONTH
YEAR PERIOD
ENDED ENDED
DEC. 31 DEC. 31 FOR THE YEAR ENDED SEPTEMBER 30
------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.11 $10.10 $10.24 $9.74 $10.74 $10.69
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.58 0.16 0.54 0.55 0.52 0.60
Net Realized and Unrealized
Gain (Loss) on Investments 0.23 0.01 (0.14) 0.50 (1.00) 0.49
------- ------- ------- ------- ------- -------
Total from Investment Operations 0.81 0.17 0.40 1.05 (0.48) 1.09
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.58) (0.16) (0.54) (0.55) (0.52) (0.60)
Distributions from Realized Gains -- -- -- -- -- (0.44)
------- ------- ------- ------- ------- -------
Total Distributions (0.58) (0.16) (0.54) (0.55) (0.52) (1.04)
------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $10.34 $10.11 $10.10 $10.24 $9.74 $10.74
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL RETURN 8.29% 1.68%* 4.00% 11.07% (4.56)% 10.51%
NET ASSETS AT END OF PERIOD (000'S) $15,698 $14,679 $14,668 $13,774 $13,367 $14,706
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 0.92% 0.85%**+ 1.01% 0.96% 0.90% 0.99%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 5.74% 6.30%** 5.30% 5.51% 5.08% 5.52%
PORTFOLIO TURNOVER RATE 82.36% 125.42%** 294.25% 124.90% 75.46% 104.94%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Net of reimbursements by advisor. Excluding the reimbursements, the
annualized ratio of expenses to average net assets for the period ended
December 31, 1996, would have been 1.07%
-29-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO INTERMEDIATE-TERM U.S. TREASURY FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------- ----------------------
FOR THE THREE-MONTH FOR THE THREE-MONTH
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DEC. 31 DEC. 31 DEC. 31 DEC. 31
1997 1996 1997 1996
- ----------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.11 $10.10 $10.12 $10.10
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.55 0.15 0.48 0.14
Net Realized and Unrealized
Gain (Loss) on Investments 0.24 0.01 0.23 0.02
------- ------- ------- -------
Total from Investment Operations 0.79 0.16 0.71 0.16
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.55) (0.15) (0.48) (0.14)
------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $10.35 $10.11 $10.35 $10.12
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN+ 8.03% 1.63%* 7.27% 1.55%*
NET ASSETS AT END OF PERIOD (000'S) $365 $704 $432 $223
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.32% 1.07%**++ 1.87% 1.72%**++
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 5.36% 6.07%** 4.78% 5.35%**
PORTFOLIO TURNOVER RATE 82.36% 125.42%** 82.36% 125.42%**
- -----------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
++ Net of reimbursements by advisor. Excluding the reimbursements, the
annualized ratio of expenses to average net assets for the period ended
December 31, 1997, would have been 1.30% and 1.95% for Class A and Class B,
respectively.
-30-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND FUND
NO-LOAD CLASS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
1997 1996 1995 1994 1993+
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $8.35 $8.77 $8.15 $9.08 $9.57
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.42 0.41 0.44 0.27 (0.62)
Net Realized and Unrealized
Gain (Loss) on Investments 0.25 (0.42) 0.94 (0.93) 0.15
------- ------- ------- ------- -------
Total from Investment Operations 0.67 (0.01) 1.38 (0.66) (0.47)
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.42) (0.41) (0.44) (0.27) --
Distributions from Realized Gains -- -- (0.32) -- (0.02)
------- ------- ------- ------- -------
Total Distributions (0.42) (0.41) (0.76) (0.27) (0.02)
------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $8.60 $8.35 $8.77 $8.15 $9.08
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN 8.23% 0.02% 17.35% (3.01)%# N/A
NET ASSETS AT END OF PERIOD (000'S) $4,627 $4,215 $4,497 $4,627 $91
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.15% 1.27% 1.16% 1.37% 11.75%
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS 4.98% 4.86% 5.14% 4.47% (6.75)%
PORTFOLIO TURNOVER RATE 176.50% 136.29% 78.78% 129.56% None
- --------------------------------------------------------------------------------------------------------------
</TABLE>
# Total return from February 28, 1994 (initial public offering) to December
31, 1994; not annualized.
+ Financial highlights relate only to the performance of the initial seed
investment of SAFECO Asset Management Company. Trust shares were not
available to the public until 1994.
-31-
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
SAFECO MANAGED BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------- ----------------------
FOR THE THREE-MONTH FOR THE THREE-MONTH
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DEC. 31 DEC. 31 DEC. 31 DEC. 31
1997 1996 1997 1996
- ----------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $8.35 $8.35 $8.35 $8.35
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.39 0.11 0.32 0.09
Net Realized and Unrealized
Gain on Investments 0.25 -- 0.25 --
------- ------- ------- -------
Total from Investment Operations 0.64 0.11 0.57 0.09
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (0.39) (0.11) (0.32) (0.09)
------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $8.60 $8.35 $8.60 $8.35
------- ------- ------- -------
------- ------- ------- -------
TOTAL RETURN+ 7.78% 1.34%* 6.91% 1.15%*
NET ASSETS AT END OF PERIOD (000'S) $146 $140 $120 $100
RATIO OF EXPENSES TO
AVERAGE NET ASSETS 1.45% 1.30%** 2.23% 2.07%**
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS 4.68% 5.22%** 3.79% 4.45%**
PORTFOLIO TURNOVER RATE 176.50% 136.29%** 176.50% 136.29%**
- -----------------------------------------------------------------------------------------------
</TABLE>
* Not annualized.
** Annualized.
+ Excludes the effects of sales charges. If sales charges were included, the
total return would be lower.
-32-
<PAGE>
- --------------------------------------------------------------------------------
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, 1997, and the related
statements of operations, the statements of changes in net assets, and the
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Trusts'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective funds constituting the SAFECO Taxable Bond Trust and
SAFECO Managed Bond Trust at December 31, 1997, the results of their operations,
the changes in their net assets, and the financial highlights for each of the
periods indicated therein, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Seattle, Washington
January 30, 1998
-33-
<PAGE>
- --------------------------------------------------------------------------------
This page left blank intentionally.
-34-
<PAGE>
- --------------------------------------------------------------------------------
SAFECO FAMILY OF FUNDS
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
TAXABLE BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
SAFECO Managed Bond Fund
TAX-FREE BOND INCOME
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME
WITH LONG-TERM GROWTH
SAFECO Income Fund
SAFECO Balanced Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Small Company Stock Fund
SAFECO U.S. Value Fund
For more complete information on any
SAFECO Mutual Fund, including management
fees and expenses, call or write for a
free Prospectus. Please read it
carefully before you invest or send
money.
-35-
<PAGE>
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
David H. Longhurst
Assistant Controller
INVESTMENT ADVISOR:
SAFECO Asset
Management Company
DISTRIBUTOR:
SAFECO Securities, Inc.
TRANSFER AGENT:
SAFECO Services Corporation
CUSTODIAN:
State Street Bank
INDEPENDENT AUDITOR:
Ernst & Young LLP
FOR SHAREHOLDER SERVICE:
Monday-Friday,
5:30am-7:00pm Pacific Time
NATIONWIDE: 1-800-624-5711
SEATTLE: (206) 545-7319
DEAF AND HARD OF HEARING
TTY/TDD SERVICE: 1-800-438-8718
FOR 24-HOUR AUTOMATED
PERFORMANCE INFORMATION
AND TRANSACTIONS:
NATIONWIDE: 1-800-835-4391
SEATTLE: (206) 545-5113
MAILING ADDRESS:
SAFECO Mutual Funds
P.O. Box 34890
Seattle, WA 98124-1890
INTERNET:
www.safecofunds.com
EMAIL: [email protected]
GMF 660 2/98
Printed on Recycled Paper.
This report must be preceded or
accompanied by a current prospectus.
- -Registered Trademark- Registered trademark of SAFECO Corporation.
