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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB INVESTMENTS
101 Montgomery Street, San Francisco, CA 94104
DECEMBER 29, 1995
This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Prospectuses, which may be amended from
time to time, dated December 29, 1995, for the Schwab 1000 Fund(R), the Schwab
Long-Term Government Bond Fund, the Schwab Short/Intermediate Government Bond
Fund, the Schwab Long-Term Tax-Free Bond Fund, the Schwab Short/Intermediate
Tax-Free Bond Fund, the Schwab California Long-Term Tax-Free Bond Fund, and the
Schwab California Short/Intermediate Tax-Free Bond Fund (each a "Fund" and,
collectively, the "Funds"), seven separately managed investment portfolios of
Schwab Investments (the "Trust"). To obtain a copy of one or more of these
Prospectuses, please call Charles Schwab & Co., Inc. ("Schwab") at 800-2
NO-LOAD, 24 hours a day or or write to Schwab at 101 Montgomery Street, San
Francisco, CA 94104. These Prospectuses also are available electronically by
using our Internet address: http://www.schwab.com.
SCHWABFunds(R)
800-2 NO-LOAD
TABLE OF CONTENTS
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INVESTMENT SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MANAGMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PORTFOLIO TRANSACTIONS AND TURNOVER. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SHARE PRICE CALCULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
TOTAL RETURN AND YIELD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SCHWABFUNDS INVESTMENT STRATEGIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
APPENDIX - RATINGS OF INVESTMENT SECURITIES. . . . . . . . . . . . . . . . . . . . . . . 45
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
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INVESTMENT SECURITIES
U.S. GOVERNMENT SECURITIES
Direct obligations of the United States Government are supported by
the full faith and credit of the United States Treasury. While obligations of
certain United States Government agencies and instrumentalities are similarly
backed, those of others, such as the Federal National Mortgage Association and
the Student Loan Marketing Association, are only supported by the right of the
issuer to borrow from the U.S. Treasury, the discretionary authority of the
U.S. Government to purchase the agency's obligations or the credit of the
issuing agency or instrumentality. There can be no assurance that the U.S.
Government would provide financial support to United States Government
sponsored agencies or instrumentalities if it is not obligated to do so by law.
A Fund will invest in U.S. Government securities not backed by the full faith
and credit of the United States Treasury only when Charles Schwab Investment
Management, Inc. (the "Investment Manager") is satisfied that the credit risk
with respect to their issuer is minimal.
GOVERNMENT
"MORTGAGE BACKED" SECURITIES
Among the U.S. Government securities in which the Funds may invest are
government "mortgage-backed" (or government guaranteed mortgage- related)
securities. Mortgages backing the securities purchased by the Funds include,
among others, conventional thirty year fixed rate mortgages, graduated payment
mortgages, fifteen year mortgages and adjustable rate mortgages. All of these
mortgages can be used to create pass-through securities. A pass-through
security is formed when mortgages are pooled together and undivided interest in
the pool or pools are sold. The cash flow from the mortgages is passed through
to the holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal then their
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of pass-through
certificates. Prepayment rates are important because of their effect on the
yield and price of the securities. Accelerated prepayments adversely impact
yields for pass-throughs purchased at a premium (i.e., a price in excess of
principal amount) and may involve additional risk of loss of principal because
the premium may not have been fully amortized at the time the obligation is
repaid. The opposite is true for pass-throughs purchased at a discount. The
Funds may purchase mortgage-related securities at a premium or at a discount.
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Principal and interest payments on the mortgage-related securities are
government guaranteed to the extent described below. Such guarantees do not
extend to the value or yield of the mortgage-related securities themselves or
of a Fund's shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgaged securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the United States. The GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before
the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee, except to the extent that a
Fund has purchased the certificates above par in the secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years. The FHLMC guarantee is not backed by
the full faith and credit of the United States.
FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA. FNMA issues guaranteed
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mortgage pass-through certificates ("FNMA Certificates"). FNMA Certificates
resemble GNMA Certificates in that each FNMA Certificate represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FNMA guarantees timely payment of interest and principal on FNMA
Certificates. The FNMA guarantee is not backed by the full faith and credit of
the United States.
OTHER ASSET-BACKED SECURITIES
Each Fund may invest a portion of its assets in debt obligations known
as "Asset-Backed Securities" that are rated in one of the four highest rating
categories by a nationally recognized statistical rating organization (e.g.,
Standard & Poor's Corporation or Moody's Investors Service, Inc.) or, if not so
rated, deemed to be of equivalent quality by the Investment Manager pursuant to
guidelines adopted by the Board of Trustees. The credit quality of most
Asset-Backed Securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator (or any other affiliated
entities), and the amount and quality of any credit support provided to the
securities. The rate of principal payments on asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets, which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any asset-backed security is difficult to
predict with precision and actual yield to maturity may be more or less than
the anticipated yield to maturity. Asset-Backed Securities may be classified
as "Pass-Through Certificates" or "Collateralized Obligations."
"Pass-Through Certificates" are asset-backed securities that represent
undivided fractional ownership interests in the underlying pool of assets.
Pass-Through Certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because Pass-Through Certificates represent ownership interests in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such Asset-Backed Securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
Asset-Backed Securities and any credit support provided. As a result, although
payments on such Asset-Backed Securities are obligations of the issuers, in the
event of default on the underlying assets not covered by any credit support,
the issuing entities are unlikely to have sufficient assets to
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satisfy their obligations on the related Asset-Backed Securities.
METHODS OF ALLOCATING
CASH FLOWS
While many Asset-Backed Securities are issued with only one class of
security, many others are issued in more than one class, each with different
payment terms. Multiple class Asset-Backed Securities are issued for two main
reasons. First, multiple classes may be used as a method of providing credit
support. This is accomplished typically through creation of one or more
classes whose right to payments on the Asset-Backed Security is made
subordinate to the right to such payments of the remaining class or classes.
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of
each other and from those of the underlying assets. Examples include so-called
"multi-tranche CMOs" (collateralized mortgage obligations) with serial
maturities such that all principal payments received on the mortgages
underlying the securities are first paid to the class with the earliest stated
maturity, and then sequentially to the class with the next stated maturity),
"Strips" (Asset-Backed Securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the
assets backing the security), and securities with a class or classes having
characteristics which mimic the characteristics of non-Asset-Backed Securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark changes) or scheduled amortization of principal.
TYPES OF CREDIT SUPPORT
Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default on the underlying assets. Liquidity protection refers to the provision
of advances, generally by the entity administering the pool of assets, to
ensure that scheduled payments on the underlying pool are made in a timely
fashion. Protection against ultimate default ensures payment on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained from third
parties, through various means of structuring the transaction, or through a
combination of such approaches. Examples of Asset-Backed Securities with
credit support arising out of the structure of the transaction include
"senior-subordinated securities" (multiple class Asset-Backed Securities with
certain classes subordinate to other classes as to the payment of principal
thereon, with the result that defaults on the underlying assets are borne first
by the holders of the subordinated class) and Asset-Backed Securities that have
"reserve funds" (where cash or investments, sometimes funded from a portion of
the initial payments on the underlying assets, are
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held in reserve against future losses) or that have been "overcollateralized"
(where the scheduled payments on, or the principal amount of, the underlying
assets substantially exceed that required to make payment on the Asset-Backed
Securities and pay any servicing or other fees). The degree of credit support
provided on each issue is based generally on historical information respecting
the level of credit risk associated with such payments. Delinquency or loss in
excess of that anticipated could adversely affect the return on an investment
in an Asset-Backed Security.
CREDIT CARD RECEIVABLE SECURITIES
Each Fund may invest in Asset-Backed Securities backed by receivables
from revolving credit card agreements ("Credit Card Receivable Securities").
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used
to fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account.
The initial fixed period usually may be shortened upon the occurrence of
specified events that signal a potential deterioration in the quality of the
assets backing the security, such as the imposition of a cap on interest rates.
The ability of the issuer to extend the life of an issue of Credit Card
Receivable Securities thus depends upon the continued generation of additional
principal amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. Competitive and general economic factors
could adversely affect the rate at which new receivables are created in an
Account and conveyed to an issuer, shortening the expected weighted average
life of the related Credit Card Receivable Security, and reducing its yield.
An acceleration in cardholders' payment rates or any other event that shortens
the period during which additional credit card charges on an Account may be
transferred to the pool of assets supporting the related Credit Card Receivable
Security could have a similar effect on the weighted average life and yield.
Credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing amounts paid on Accounts. In addition, unlike most other
Asset-Backed Securities, Accounts are unsecured obligations of the cardholder.
MUNICIPAL SECURITIES
"Municipal Securities" are debt securities issued by a state, its
political subdivisions, agencies, authorities, and corporations. Municipal
Securities issued by or on behalf of the State of California, its subdivisions,
agencies or authorities are referred to herein as "California Municipal
Securities."
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Municipal Securities that the Schwab Long-Term Tax-Free Bond Fund and
the Schwab Short/Intermediate Tax-Free Bond Fund (the "Municipal Bond Funds")
may purchase, and California Municipal Securities that the Schwab California
Long-Term Tax-Free Bond Fund and the Schwab California Short/Intermediate
Tax-Free Bond Fund (the "California Municipal Bond Funds") may purchase
include, without limitation, debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, public utilities, schools, streets, and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to loan to other public institutions and
facilities.
Municipal Securities include securities issued to finance various
private activities, including certain types of private activity bonds
("industrial development bonds" under prior law). These securities may be
issued by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. The Municipal Bond Funds and the
California Municipal Bond Funds may not be desirable investments for
"substantial users" of facilities financed by private activity bonds or
industrial development bonds or for "related persons" of substantial users for
whom dividends attributable to interest on such bonds may not be tax-exempt.
Shareholders should consult their own tax advisers regarding the potential
effect on them (if any) of any investment in these Funds.
Municipal Securities generally are classified as "general obligation"
or "revenue." General obligation notes are secured by the issuer's pledge of
its full credit and taxing power for the payment of principal and interest.
Revenue notes are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Private activity bonds and
industrial development bonds that are Municipal Securities are in most cases
revenue bonds and generally do not constitute the pledge of the credit of the
issuer of such bonds.
Examples of Municipal Securities that are issued with original
maturities of one year or less are short-term tax anticipation notes, bond
anticipation notes, revenue anticipation notes, construction loan notes,
pre-refunded municipal bonds and tax-free commercial paper. Tax anticipation
notes typically are sold to finance working capital needs of municipalities in
anticipation of receiving property taxes on a future date. Bond anticipation
notes are sold on an interim basis in anticipation of a municipality issuing a
longer term bond in the future. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as those available under
the Federal Revenue Sharing Program. Construction loan notes are instruments
insured by the Federal Housing Administration with permanent financing by
"Fannie Mae"
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(the Federal National Mortgage Association) or "Ginnie Mae" (the Government
National Mortgage Association) at the end of the project construction period.
Pre-refunded municipal bonds are bonds that are not yet refundable, but for
which securities have been placed in escrow to refund an original municipal
bond issue when it becomes refundable. Tax-free commercial paper is an
unsecured promissory obligation issued or guaranteed by a municipal issuer.
The Municipal Bond Funds and the California Municipal Bond Funds may purchase
other Municipal Securities similar to the foregoing, which are or may become
available, including securities issued to pre-refund other outstanding
obligations of municipal issuers.
The federal bankruptcy statutes relating to the adjustments of debts
of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or
consent of creditors, which proceedings could result in material adverse
changes in the rights of holders of obligations issued by such subdivisions or
authorities.
Litigation challenging the validity under the state constitutions of
present systems of financing public education has been initiated or adjudicated
in a number of states, and legislation has been introduced to effect changes
in public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law which ultimately could
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
RISK FACTORS:
CALIFORNIA MUNICIPAL SECURITIES
In addition to general economic pressures which affect the State of
California's ability to raise revenues to meet its financial obligations,
certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could also result in
the adverse effects described below. The following information is only a brief
summary, is not a complete description and is based on information drawn from
official statements and prospectuses relating to securities offerings of the
State of California that have come to the attention of the Trust and were
available before the date of this Statement of Additional Information. The
Trust has not independently verified the accuracy and completeness of the
information contained in those statements and prospectuses.
As used in this section, "California Municipal Securities" includes
issues that are secured by a direct payment obligation of the State and
obligations of issuers that rely in whole or in part on State revenues for
payment of their obligations. Property tax revenues and part of the State's
General Fund surplus are distributed to counties, cities and their various
taxing entities; whether and to what extent a portion of the State's
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General Fund will be distributed in the future to them is unclear.
Overview. From mid-1990 to late 1993, the State suffered a recession
with the worst economic, fiscal and budget conditions since the 1930's.
Construction, manufacturing (especially aerospace), exports and financial
services, among others, all have been severely affected. Job losses were the
worst of any post-war recession. While a steady recovery has been underway
since 1994, pre-recession employment levels are not expected to be reached
until later in the decade.
The recession seriously affected State tax revenues and caused an
increase in expenditures for health and welfare programs. As a result, the
State has experienced recurring budget deficits. The State Controller reports
that expenditures exceeded revenues for four of the five fiscal years ending
with 1991-1992. Revenue and expenditures essentially were equal in 1992-1993;
the State's accumulated budget deficit approached $2.8 billion at its peak at
June 30, 1993. A further consequence of the large budget imbalances has been
that the State depleted its available cash resources and has had to use a
series of external borrowings to meet its cash needs.
As a result of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since October 1992,
all three major nationally recognized statistical rating organizations have
lowered the State's general obligation bond rating from the highest ranking of
"AAA" to "A" by Standard and Poor's Corporation, "A1" by Moody's Investors
Service, Inc. and "A" by Fitch Investors Service, Inc.
State Appropriations Limit. Subject to certain exceptions, the State
is subject to an annual appropriations limit imposed by its Constitution on
"proceeds of taxes." Various expenditures, including but not limited to debt
service on certain bonds and appropriations for qualified capital outlay
projects, are not included in the appropriations limit.
1994-1995 FISCAL YEAR
Revenues. The 1994-1995 Budget Act projected General Fund revenues
and transfers in 1994-1995 of $41.9 billion, or about $2.1 billion more than
1993-1994, as revised. This projection included the receipt of approximately
$760 million in new federal aid to reimburse the State for certain costs
related to refugees and undocumented foreign immigrants. The State Department
of Finance's analysis of the federal 1995 budget indicates, however, that only
about $98 million of this amount was appropriated for California, and that
about $33 million of this amount would be received during 1994-1995 with the
balance to be received during 1995-1996. The 1994-1995 Budget Act also
projected Special Fund revenues of $12.1 billion, a decrease of 2.4% from
1993-1994.
Expenditures. The 1994-1995 Budget Act projected General Fund
expenditures of $40.9 billion (a 1.6% increase from projected 1993-1994
expenditures), in order to keep a balanced budget which pays off the
accumulated
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deficit, within available revenues. The 1994-1995 Budget Act also projected
Special Fund expenditures of $12.3 billion, a 4.7% decrease from 1993-1994.
The 1994-1995 Budget Act balanced the budget with a number of major
adjustments, including the receipt of about $1.1 billion from the federal
government for health and welfare costs and an increase of about $526 million
in Proposition 98 General Fund support for K-14 schools.
Cash resources at the beginning of the 1994-1995 fiscal year were
insufficient to meet all obligations without external borrowing, such as
occurred in 1992. The 1994-1995 Budget Act assumed that the State would use a
cash flow borrowing program in 1994-1995 which combined one-year notes and
two-year warrants, which have now been issued. Issuance of the warrants allows
the State to defer repayment of about $1 billion of its accumulated budget
deficit into 1995-1996. Additional legislation was passed with the 1994-1995
Budget Act designed to ensure that the warrants will be repaid in the 1995-1996
fiscal year.
1995-1996 FISCAL YEAR
The 1995-1996 Budget Act was enacted on August 3, 1995, 34 days after
the start of the fiscal year. The 1995-1996 Budget Act contains a reforecast
of revenues and expenditures for 1994-1995, which estimates that General Fund
revenues and transfers will increase from the 1994-1995 Budget Act estimate of
$41.9 billion to about $42.2 billion, but also estimates that General Fund
expenditures will increase to $41.7 billion from the 1994-1995 Budget Act
estimate of $40.9 billion.
Revenues. The 1995-1996 Budget Act projects General Fund revenues and
transfers of $44.1 billion, a 3.5% increase from 1994-1995. The 1995-1996
Budget Act projects that the General Fund will end the 1995-1996 fiscal year
with a slight surplus at June 30, 1996, and that all of the accumulated budget
deficits will have been repaid. Principal features of the 1995-1996 Budget Act
include an increase in Proposition 98 funding for K-14 schools of about $1.2
billion, reductions in health and welfare costs of about $900 million (about
$500 million of which depends upon federal legislative approval), and receipt
of an additional $473 million in federal aid for costs of illegal immigrants
(above commitments already made by the federal government). Special Fund
revenues are estimated at $12.7 billion.
Expenditures. The 1995-1996 Budget Act projects General Fund
expenditures of $43.4 billion, a 4% increase from 1994-1995. Special Fund
expenditures of $13 billion have been appropriated.
The foregoing discussions of the 1994-1995 and 1995-1996 Budgets are
based upon the Budget Acts for these years, and should not be construed as a
statement of fact. The assumptions used to construct a budget, which include
estimates and projections of revenues and expenditures, may be affected by
numerous factors, including future economic conditions in the State and the
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Nation. There can be no assurances that any estimates will be achieved.
ISSUES AFFECTING LOCAL
GOVERNMENTS AND SPECIAL DISTRICTS
Proposition 13. Certain California Municipal Securities may be
obligations of issuers that rely in whole or in part on ad valorem real
property taxes as a source of revenue. In 1978, California voters approved
Proposition 13, which limits ad valorem taxes on real property and restricts
the ability of taxing entities to increase property tax and other tax revenues.
With certain exceptions, the maximum ad valorem tax on real property
is limited to 1% of the full cash value to be collected by the counties and
apportioned according to law. One exception is for debt service on bonded
indebtedness if such is approved by two-thirds of the votes cast by voters
voting on the proposition. The full cash value may be adjusted annually to
reflect inflation at a rate not to exceed 2% per year, or reduction in the
consumer price index or comparable local data, or reduced in the event of
declining property value caused by substantial damage, destruction or other
factors, or adjusted when there is a "change in ownership" or "new
construction."
Proposition 62. This initiative, approved by voters in 1986, placed
further restrictions on the ability of local governments to raise taxes and
allocate approved tax revenues. Although some of the California Courts of
Appeal held that parts of Proposition 62 were unconstitutional, the California
Supreme Court recently issued a decision that upheld Proposition 62's
requirement that special taxes be approved by a two-thirds vote of the voters
voting in an election on the issue. This recent decision may invalidate other
taxes that have been imposed by local governments in California and make it
more difficult for local governments to raise taxes.
Propositions 98 and 111. These initiatives changed the State
appropriations limit and State funding of public education below the university
level by guaranteeing K-14 schools a minimum share of General Fund revenues.
The initiatives require that the State establish a prudent state reserve fund
for public education.
Appropriations Limit. Local governmental entities are also subject to
annual appropriations limits. If a local government's revenues in any year
exceed the amount permitted to be spent, the excess must be returned to the
public through a revision of tax rates or fee schedules over the following two
years.
Conclusion. The effect of these constitutional and statutory changes
and of budget developments on the ability of California issuers to pay interest
and principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected). There is no assurance that
any California issuer will make full or timely payments of principal or
interest or remain solvent. For example, in December 1994, Orange
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County filed for bankruptcy. The California Municipal Bond Funds'
concentration in California Municipal Securities provides a greater level of
risk than a fund that is diversified across numerous states and municipal
entities.
ADDITIONAL ISSUES
Mortgages and Deeds of Trust. The California Municipal Bond Funds may
invest in issues which are secured in whole or in part by mortgages or deeds of
trust on real property. California law limits the remedies of a creditor
secured by a mortgage or deed of trust, which may result in delays in the flow
of revenues to an issuer.
Lease Financings. Some local governments and districts finance
certain activities through lease arrangements. It is uncertain whether such
lease financings are debt that require voter approval.
Seismic Risk. It is impossible to predict the time, magnitude or
location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck Los Angeles, causing significant damage
to structures and facilities in a four county area. The possibility exists
that another such earthquake could create a major dislocation of the
California economy.
CERTIFICATES OF DEPOSIT
AND BANKERS' ACCEPTANCES
Certificates of deposit are certificates issued against funds
deposited in a banking institution for a specified period of time at a
specified interest rate. Bankers' acceptances are credit instruments
evidencing a bank's obligation to pay a draft drawn on it by a customer. These
instruments reflect the obligation both of the bank and of the drawer to pay
the full amount of the instrument upon maturity. A Fund will only invest in
certificates of deposit and bankers' acceptances of banks having capital,
surplus and undivided profits in excess of $100 million.
COMMERCIAL PAPER
Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs. The Funds will only invest in
commercial paper that at the time of purchase is rated Prime-1 or Prime-2 by
Moody's Investors Service ("Moody's"), A-1 or A-2 by Standard and Poor's
Corporation ("S&P"), "Duff 2" or higher by Duff & Phelps Credit Rating Co.
("Duff"), or "F2" or higher by Fitch Investors Services, Inc. ("Fitch") or if
unrated by Moody's, S&P, Duff or Fitch, is determined by the Investment
Manager, using guidelines approved by the Board of Trustees, to be at least
equal in quality to one or more of the above ratings.
REPURCHASE AGREEMENTS
Repurchase agreements are instruments under which a buyer acquires
ownership of a security from a seller that agrees to repurchase the security at
a mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the buyer's holding period.
12
<PAGE> 13
Any repurchase agreements entered into by a Fund will involve the Fund as the
buyer and banks or broker-dealers as sellers (repurchase agreements with
broker-dealers will be limited to obligations of the U.S. Government, its
agencies or instrumentalities), and will be fully collateralized and marked to
market on a daily basis.
In the event of a bankruptcy or other default of a repurchase
agreement's seller, a Fund might incur expenses in enforcing its rights, and
could experience losses, including a decline in the value of the underlying
securities and loss of income. A Fund will not invest more than 10% of its
total assets at the time of purchase in repurchase agreements maturing in more
than seven days and other illiquid securities.
PORTFOLIO MATURITY
From time to time, the California Municipal Bond Funds, the Municipal
Bond Funds and the Government Bond Funds may compare their average portfolio
maturities with the average portfolio maturities of other mutual funds having
similar investment objectives.
PORTFOLIO SECURITIES LENDING
Loans of portfolio securities made by any Fund will be fully
collateralized and will be marked to market daily.
FUTURES AND OPTIONS CONTRACTS,
EQUITY INDEX PARTICIPATIONS AND
INDEX PARTICIPATION CONTRACTS
The Schwab Short/Intermediate Government Bond Fund and the Schwab
Long-Term Government Fund (the "Government Bond Funds") and the Schwab 1000
Fund(R) (for purposes of this sub-section only, each a "Fund" and, together,
the "Funds") may buy and sell futures contracts on securities and any index
comprised of securities in which it may invest, option contracts on securities,
indexes and futures contracts, equity index participations, and index
participation contracts.
In a securities futures contract one party agrees to make, and the
other agrees to take, delivery of a specific amount of a specific security at a
specified time and price. Under a securities index futures contract, the
parties agree to make or take delivery of an amount of cash equal to a specific
dollar amount times the difference between the value of an agreed-upon
securities index at the end of the contract period and its value at the time
the agreement was originally made. Futures contracts are commonly "closed out"
prior to the end of the contract period by entering into an offsetting
transaction in a corresponding futures contract.
Options on indexes are similar to options on securities except that,
rather than representing the right to take or make delivery of a security at a
specified exercise price, an option on a securities index gives the holder the
right to receive, upon exercise of the option, an amount of
13
<PAGE> 14
cash if the closing level of the securities index upon which the option is
based is "in the money." This amount of cash is equal to the difference
between the closing level of the index and the exercise price of the option,
expressed in dollars times a specified multiple. Unlike securities options,
all settlements are in cash, and gain or loss depends on price movements in the
group of securities comprising the index rather than price movements of
individual securities.
Index participations and index participation contracts provide the
equivalent of a position in the securities comprising an index, with each
security's representation equaling its index weighting. Moreover, their
holders are entitled to payments equal to the dividends paid by the underlying
index securities. Generally, the value of an index participation or index
participation contract will rise and fall along with the value of the related
index. A Fund will invest in equity index participations and index
participation contracts only if a liquid market for them appears to exist.
When buying or selling futures contracts, a Fund must deposit an
amount of cash, cash equivalents, or high quality debt instruments with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract, which will be returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," will be
made at least daily as the price of the futures contract fluctuates, and the
Fund's position in the contract becomes more or less valuable, a process known
as "marking-to-market."
Regulations of the Commodities Futures Trading Commission ("CFTC")
applicable to the Funds generally require that all of their futures
transactions constitute "bona fide" hedging transactions. As a result, a Fund
will normally sell futures contracts to protect against a decrease in the price
of securities it owns but intends to sell, or purchase futures contracts to
protect against an increase in the price of securities it intends to purchase.
In addition, the Funds may purchase and sell futures contracts and options as a
substitute for a comparable market position in the underlying securities.
Futures transactions need not constitute "bona fide" hedging under CFTC
regulations if the aggregate initial margin and premiums required to establish
such positions do not exceed 5% of each Fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and
options transactions involve risks which, in some strategies, can be
substantial, due to the low margin deposits required and the extremely high
degree of leverage involved in futures and options trading. However, to the
extent the Funds' futures and options practices are limited to hedging
purposes, the Investment Manager does not believe that the Funds are subject to
the degree of risk frequently associated with futures and options transactions.
To the extent the Funds engage in the use of futures and options
14
<PAGE> 15
on futures other than for hedging purposes, the Funds may be subject to
additional risk.
Three principal areas of risk are present when futures and options
contracts are used even in a hedging context. First, there may not always be a
liquid secondary market for a futures or option contract at the time when a
Fund seeks to "close out" its position. If a Fund were unable to "close out" a
futures or option position, and if prices moved adversely, the Fund would have
to continue to make daily cash payments to maintain its required margin, and if
the Fund had insufficient cash to meet this requirement, it might have to sell
portfolio securities at a disadvantageous time. In addition, the Fund might be
required to deliver the securities underlying futures or options contracts it
holds. Each Fund will seek to reduce the risk that it will be unable to "close
out" contracts by only entering into futures or options contracts that are
traded on national exchanges and for which there appears to be a liquid
secondary market.
It is also possible that changes in the prices of futures or options
contracts might correlate imperfectly, or not at all, with changes in the
market values of the securities being hedged. This situation could result from
price distortions in the futures or options markets due to, among other things,
active trading by speculators and use of offsetting "closing" transactions by
other investors seeking to avoid meeting additional margin deposit
requirements. In the event of significant market distortions, it is possible
that a Fund could lose money on futures or options contracts and experience
appreciation in the value of its portfolio securities, or vice versa.
Finally, adverse market movements could cause a Fund to lose up to its
full investment in an options contract and/or to experience substantial losses
on an investment in a futures contract. However, barring the just referenced
significant market distortions, a similar result could be expected were the
Fund to invest directly in the securities being hedged. There is also the risk
of loss by a Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or option.
The extent to which each Fund may purchase and sell futures, options,
equity index participations and index participation contracts may be limited by
the fact that each Fund intends to meet Internal Revenue Code of 1986 (the
"Code") requirements for qualification as a regulated investment company. See
"Federal Income Tax."
15
<PAGE> 16
INVESTMENT RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the Investment Company Act of
1940, as amended, hereinafter the "1940 Act") of the Fund to which they apply.
A Fund may not:
1) As to 75% of its assets, purchase securities of any issuer
(other than obligations of, or guaranteed by, the United
States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the value of its total assets would be
invested in the securities of such issuer, except that, with
respect to the Schwab California Long-Term Tax-Free Bond Fund,
provided that no more than 25% of the Fund's total assets
would be invested in the securities of a single issuer, up to
50% of the Fund's total assets may be invested without regard
to this 5% limitation; and, provided further, that, with
respect to the Municipal Bond Funds and the Schwab California
Short/Intermediate Tax-Free Bond Fund and as a matter of
non-fundamental policy that may be changed by the Board of
Trustees, so long as no more than 25% of the Fund's total
assets would be invested in the securities of a single issuer,
up to 50% of the Fund's total assets may be invested without
regard to the 5% limitation set forth above.
2) Purchase securities (other than securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result of such purchase, 25% or
more of the value of its total assets would be invested in any
industry (except, with respect to the Schwab 1000 Fund(R), to
the extent that the Schwab 1000 Index(R) is also so
concentrated). Securities issued by governments or political
subdivisions or authorities of governments are not considered
to be securities subject to this industry concentration
restriction.
3) Invest more than 10% of the total value of its assets in
illiquid securities, including repurchase agreements with
maturities in excess of seven days.
4) Purchase or retain securities of an issuer if any of the
officers, trustees or directors of the Trust or the Investment
Manager individually own beneficially more than 1/2 of 1% of
the securities of such issuer and together beneficially own
more than 5% of the securities of such issuer.
5) Purchase or sell commodities or real estate, including
interests in real estate limited partnerships, provided that
each Fund may (i) purchase securities of companies that deal
in real estate or interests therein, and (ii) purchase or sell
futures contracts, options contracts, equity index
participations and index participation contracts.
16
<PAGE> 17
6) Invest for the purpose of exercising control or management of
another issuer.
7) Purchase securities of other investment companies, except as
permitted by the 1940 Act.
8) Lend money to any person, except that each Fund may (i)
purchase a portion of an issue of short-term debt securities
or similar obligations (including repurchase agreements) that
are publicly distributed or customarily purchased by
institutional investors, and (ii) lend its portfolio
securities.
9) Borrow money except from banks as a temporary measure to
satisfy redemption requests or for extraordinary or emergency
purposes and then only in an amount not to exceed one-third of
the value of its total assets (including the amount borrowed),
provided that the Fund will not purchase securities while
borrowings represent more than 5% of its total assets.
10) Pledge, mortgage or hypothecate any of its assets except that
to secure allowable borrowings, each Fund may do so with
respect to no more than one-third of the value of its total
assets (10% with respect to the Municipal Bond Funds and the
Schwab California Long-Term Tax-Free Bond Fund).
11) Underwrite securities issued by others except to the extent it
may be deemed to be an underwriter, under the federal
securities laws, in connection with the disposition of
securities from its investment portfolio.
In order to permit the sale of shares of each Fund in certain
jurisdictions, each Fund may make commitments more restrictive than the
fundamental operating restrictions described above. Should it do so and later
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders, it will revoke the commitment(s) by terminating
sales of its shares in the jurisdiction(s) involved.
The following restrictions are non-fundamental and may be changed by
the Trust's Board of Trustees. Each of the Funds may not:
12) Purchase more than 10% of any class of securities of any
issuer if, as a result of such purchase, it would own more
than 10% of such issuer's outstanding voting securities.
13) Invest more than 5% of its total assets in securities of
issuers (other than obligations of, or guaranteed by the
United States Government, its agencies or instrumentalities)
that with their predecessors have a record of less than three
years continuous operation.
17
<PAGE> 18
14) Purchase securities that would cause more than 5% of its net
assets to be invested in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933 that have been
determined to be liquid under procedures adopted by the
Trust's Board of Trustees based upon the trading markets for
the securities.
15) Invest more than 5% of its net assets in warrants, valued at
the lower of cost or market, and no more than 40% of this 5%
may be invested in warrants that are not listed on the New
York Stock Exchange or the American Stock Exchange, provided,
however, that for purposes of this restriction, warrants
acquired by a Fund in units or attached to other securities
are deemed to be without value.
16) Purchase puts, calls, straddles, spreads or any combination
thereof if by reason of such purchase the value of its
aggregate investment in such securities would exceed 5% of the
Fund's total assets.
17) Make short sales, except for short sales against the box.
18) Purchase or sell interests in oil, gas or other mineral
development programs or leases, although it may invest in
companies that own or invest in such interests or leases.
19) Purchase securities on margin, except such short-term credits
as may be necessary for the clearance of purchases and sales
of securities.
20) Purchase securities the income of which is subject to the
Federal Alternative Minimum Tax (AMT) if, by reason of such
purchase, the total income earned by such securities would
exceed 20% of all income earned by the Fund.
The Schwab Long-Term Tax-Free Bond Fund and the Schwab California
Long-Term Tax-Free Bond Fund each may be invested in long-term bonds, and in
obligations of any maturity, although their dollar weighted maturities under
normal market conditions will be 10 years or longer.
18
<PAGE> 19
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The officers and trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Schwab, and Charles Schwab Investment
Management, Inc., are as follows:
<TABLE>
<CAPTION>
POSITION WITH
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
-------------- ------------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Founder, Chairman, Chief Executive Officer and
July 29, 1937 Director, The Charles Schwab Corporation; Founder,
Chairman and Director, Charles Schwab & Co., Inc. and
Charles Schwab Investment Management, Inc.; Chairman
and Director, The Charles Schwab Trust Company;
Director, Mayer & Schweitzer, Inc. (a securities
brokerage subsidiary of The Charles Schwab
Corporation); Director, The Gap, Inc. (a clothing
retailer), Transamerica Corporation (a financial
services organization) and AirTouch Communications (a
telecommunications company).
TIMOTHY F. McCARTHY** President and Trustee Executive Vice President - Mutual Funds, Charles
September 19, 1951 Schwab & Co., Inc. and The Charles Schwab
Corporation; Chief Executive Officer, Charles Schwab
Investment Management, Inc. From 1994-1995, Mr.
McCarthy was Chief Executive Officer, Jardine Fleming
Unit Trusts Ltd.; Executive Director, Jardine Fleming
Holdings Ltd.; Chairman, Jardine Fleming Taiwan
Securities Ltd.; and Director of JF India and Fleming
Flagship, Europe. Prior to 1994, he was President of
Fidelity Investments Advisor Group, a division of
Fidelity Investments in Boston.
DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
September 23, 1931 Associates (advertising and marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (real estate
June 28, 1938 investment). Prior to 1993, Mr. Stephens was
</TABLE>
__________________________________
*Mr. Schwab is an "interested person" of the Trust.
**Mr. McCarthy is an "interested person" of the Trust.
19
<PAGE> 20
<TABLE>
<CAPTION>
POSITION WITH
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
------------- ------------ --------------------
<S> <C> <C>
Chairman and Chief Executive Officer of the Bank of
San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
A. JOHN GAMBS Treasurer and Principal Executive Vice President - Finance and Chief
November 16, 1945 Financial Officer Financial Officer, The Charles Schwab Corporation;
Executive Vice President, Chief Financial Officer and
Director, Charles Schwab & Co., Inc.; Chief Financial
Officer and Director, Charles Schwab Investment
Management, Inc.; and Chief Financial Officer, The
Charles Schwab Trust Company.
WILLIAM J. KLIPP* Senior Vice President, Senior Vice President, Charles Schwab & Co., Inc.;
December 9, 1955 Chief Operating Officer President and Chief Operating Officer, Charles Schwab
and Trustee Investment Management, Inc. Prior to 1993, Mr. Klipp
was Treasurer of Charles Schwab & Co., Inc. and Mayer
& Schweitzer, Inc. Prior to 1990, he was Vice
President, Director Funding, Merrill Lynch & Co.,
Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 & Chief Investment Officer, Charles Schwab Investment Management, Inc.
Officer Prior to 1991, Mr. Ward was Vice President and
Portfolio Manager for Federated Investors.
FRANCES COLE Secretary Vice President, Chief Counsel and Compliance Officer,
September 9, 1955 and Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc. Prior to 1991, Ms. Cole
was Senior Counsel for Equitec Securities Company.
PAMELA E. HERLICH Assistant Secretary Assistant Corporate Secretary, The Charles Schwab
August 19, 1953 Corporation and Charles Schwab & Co., Inc.; Corporate
Secretary, Charles Schwab Investment Management, Inc.
and Mayer & Schweitzer, Inc. Prior to 1993, Ms.
Herlich was Assistant Corporate Secretary for Mayer &
Schweitzer, Inc. Prior to November 1995, she was
Corporate Secretary of The Charles Schwab Trust
Company.
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel - Charles Schwab
October 14, 1960 Investment Management, Inc. From 1991 to 1992, he
was Assistant Secretary and Assistant Corporate
Counsel for the Franklin Group of Mutual Funds.
Prior to 1991, he was an Associate of Thelen, Marrin,
</TABLE>
__________________________________
*Mr. Klipp is an "interested person" of the Trust.
20
<PAGE> 21
<TABLE>
<CAPTION>
POSITION WITH
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
------------- ------------- --------------------
<S> <C> <C>
Johnson & Bridges (a San Francisco law firm).
CHRISTINA M. PERRINO Assistant Secretary Vice President and Senior Counsel - Charles Schwab
June 16, 1961 Investment Management, Inc. Prior to 1994, she was
Counsel and Assistant Secretary for North American
Security Life Insurance Company and Secretary for
North American Funds.
</TABLE>
Each of the above-referenced Officers and/or Trustees also serves in
the same capacity as described for the Trust for The Charles Schwab Family of
Funds, Schwab Capital Trust, Schwab Annuity Portfolios, and Schwab Advantage
Trust (which has not yet commenced operations). The address of each individual
listed above is 101 Montgomery Street, San Francisco, California 94104.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Annual
Benefits Accrued Benefits Upon
Aggregate as Part of Fund Retirement from Total
Name of Person, Compensation Expenses from the the Fund Compensation from
Position from the Trust Fund Complex(2) Complex(2) the Fund Complex(2)
--------------- -------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F. McCarthy , 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Sr. Vice President,
Chief Operating
Officer, and Trustee
Donald F. Dorward, 16,000 N/A N/A 71,750
Trustee
Robert G. Holmes, 16,000 N/A N/A 71,750
Trustee
Donald R. Stephens, 16,000 N/A N/A 71,750
Trustee
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Annual
Benefits Accrued Benefits Upon
Aggregate as Part of Fund Retirement from Total
Name of Person, Compensation Expenses from the the Fund Compensation from
Position from the Trust Fund Complex(2) Complex(2) the Fund Complex(2)
--------------- -------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Michael W. Wilsey, 16,000 N/A N/A 71,750
Trustee
</TABLE>
1. Figures are for the Trust's fiscal year ended August 31, 1995.
2. "Fund Complex" comprises all 22 funds of the Trust, The
Charles Schwab Family of Funds, Schwab Capital Trust, and
Schwab Annuity Portfolios.
___________________________________________
TRUSTEE DEFERRED COMPENSATION PLAN
Pursuant to exemptive relief received by the Trust from the Securities
and Exchange Commission (the "SEC"), the Trust may enter into deferred fee
arrangements (the "Fee Deferral Plan" or the "Plan") with the Trust's trustees
who are not "interested persons" of any of the Funds of the Trust (the
"Independent Trustees" or the "Trustees").
As of the date of this Statement of Additional Information, none of
the Independent Trustees has elected to participate in the Fee Deferral Plan.
In the event an Independent Trustee does elect to participate in the Plan, the
Plan would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account"), as of
the date such fees would have been paid to such Trustee. The value of the
Deferred Fee Account as of any date will be equal to the value the Account
would have had as of that date if the amounts credited to the Account had been
invested and reinvested in the securities of the SchwabFund or SchwabFunds(R)
selected by the participating Trustee (the "Selected SchwabFund Securities").
SchwabFunds include the series or classes of shares of beneficial interest of
the Trust, The Charles Schwab Family of Funds, Schwab Capital Trust, and Schwab
Annuity Portfolios.
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. The exemptive relief granted to the Trust permits the
Funds and the Trustees to purchase the Selected SchwabFund(R) Securities, which
transactions would otherwise be limited or prohibited by the investment
policies and/or restrictions of the Funds. See "Investment Restrictions."
22
<PAGE> 23
INVESTMENT MANAGER
Charles Schwab Investment Management, Inc., a wholly-owned subsidiary
of The Charles Schwab Corporation, serves as the Funds' investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement
(the "Advisory Agreement") between it and the Trust. The Investment Manager is
registered as an investment adviser under the 1940 Act, and currently provides
investment management services to the SchwabFunds, a family of 21 mutual funds
with over $31 billion in assets as December 15, 1995. The Investment Manager
is an affiliate of Schwab, the Trust's distributor and shareholder services
and transfer agent. The Advisory Agreement will continue in effect for each
Fund until February 23, 1996, and thereafter will continue for one year terms
subject to annual approval by (1) the Trust's Board of Trustees or (2) a vote
of the majority (as defined in the 1940 Act) of the outstanding voting
securities of a Fund. In either event, the continuance must also be approved
by a majority of the Trust's Board of Trustees who are not parties to the
Agreement or interested persons (as defined in the 1940 Act) of any such party
by vote cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated at any time upon 60 days
notice by either party, or by a majority vote of the outstanding shares of each
Fund, and will terminate automatically upon assignment.
For its advisory and administrative services to the Schwab 1000
Fund(R), the Investment Manager is entitled to receive an annual graduated fee,
payable monthly, of 0.30% of the Fund's average daily net assets not in excess
of $500 million, and 0.22% of such assets over $500 million. For its advisory
and administrative services to the Government Bond Funds, the Municipal Bond
Funds and the California Municipal Bond Funds, the Investment Manager is
entitled to receive an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets.
The Investment Manager and Schwab have guaranteed that, through at
least April 30, 1996, the total fund operating expenses for the Schwab 1000
Fund, the Schwab Short/Intermediate Government Bond Fund, the Schwab Long-Term
Tax-Free Bond Fund, the Schwab Short/Intermediate Tax-Free Bond Fund, the
Schwab California Long-Term Tax-Free Bond Fund, and the Schwab California
Short/Intermediate Tax-Free Bond Fund will not exceed 0.49%. The Investment
Manager and Schwab have also guaranteed that through April 30, 1996, they will
absorb all the operating expenses for the Schwab Long-Term Government Bond
Fund.
Schwab 1000 Fund. During the year ended December 31, 1992, the period
ended August 31, 1993, the fiscal years ended August 31, 1994 and 1995, the
investment advisory fees incurred by the Schwab 1000 Fund were $557,474 (fees
were reduced by $240,228), $795,135 (fees were reduced by $109,899), $1,554,672
(no fees were reduced), and $1,640,000 (fees were reduced by $137,000),
respectively.
23
<PAGE> 24
The Government Bond Funds. During the period from March 5, 1993
(commencement of operations) through August 31, 1993 and the fiscal years ended
August 31, 1994 and 1995, the investment advisory fees incurred by the Schwab
Long-Term Government Bond Fund were $198 (fees were reduced by $1,810), $0
(fees were reduced by $18,943), and $0 (fees were reduced $40,554),
respectively.
During the year ended December 31, 1992, the period ended August 31,
1993 and the fiscal years ended August 31, 1994 and 1995, the investment
advisory fees incurred by the Schwab Short/Intermediate Government Bond Fund
were $155,699 (fees were reduced by $525,328), $442,719 (fees were reduced by
$255,414), $629,913 (fees were reduced by $363,412), and $439,000 (fees were
reduced $232,000), respectively.
The Municipal Bond Funds. During the period from September 11, 1992
(commencement of operations) to December 31, 1992, the period ended August 31,
1993, and the fiscal years ended August 31, 1994 and 1995, the investment
advisory fees incurred by the Schwab Long-Term Tax-Free Bond Fund were $5,192
(fees were reduced by $24,668), $8,655 (fees were reduced by $105,957),
$78,581 (fees were reduced by $116,810), and $89,000 (fees were reduced
$80,000), respectively.
During the period from April 21, 1993 (commencement of operations)
through August 31, 1993, and the fiscal years ended August 31, 1994 and 1995,
the investment advisory fees incurred by the Schwab Short/Intermediate Tax-Free
Bond Fund were $4,743 (fees were reduced by $61,069), $91,945 (fees were
reduced by $182,991), and $97,000 (fees were reduced $130,000), respectively.
The California Municipal Bond Funds. During the period from February
24, 1992 (commencement of operations) to December 31, 1992, the period ended
August 31, 1993, and the fiscal years ended August 31, 1994 and 1995, the
investment advisory fees incurred by the Schwab California Long-Term Tax-Free
Bond Fund were $25,689 (fees were reduced by $135,238), $198,060 (fees were
reduced $114,265), $315,733 (fees were reduced by $182,153), and $245,000 (fees
were reduced $130,000), respectively.
During the fiscal period from April 21, 1993 (commencement of
operations) through August 31, 1993, and the fiscal years ended August 31, 1994
and 1995, the investment advisory fees incurred by the Schwab California
Short/Intermediate Tax-Free Bond Fund were $3,481 (fees were reduced by
$44,520), $75,136 (fees were reduced by $139,229), and $77,000 (fees were
reduced $94,000), respectively.
Additional Information. The Advisory Agreement provides that the fees
to be paid to the Investment Manager will be less than the amount that would
cause the aggregate operating expenses of a Fund (excluding interest, taxes,
net brokerage commissions and extraordinary expenses) in any year to exceed the
most stringent limits prescribed by any state in which shares of the Fund are
offered for sale. The most stringent current limit for such expenses is 2.5%
of a fund's first $30
24
<PAGE> 25
million of average net assets, 2.0% of a fund's next $70 million of average net
assets and 1.5% of a fund's average net assets in excess of $100 million. PNC
Bank, N.A., at the Airport Business Center, 200 Stevens Drive, Suite 440,
Lester, Pennsylvania 19113, is the custodian for the Trust.
From time to time, each Fund may compare its total operating expense
ratio to the total operating expense ratio of other mutual funds or mutual fund
averages as reported by Lipper Analytical Service, Inc., Morningstar, Inc. or
other independent sources of such information ("independent sources").
SUB-ADVISER
Prior to June 1, 1995, Dimensional Fund Advisors Inc. ("Dimensional")
served as the sub-adviser to the Schwab 1000 Fund(R). As of June 1, 1995, the
Investment Manager became responsible for providing all investment advisory
services to the Schwab 1000 Fund.
Under the sub-advisory agreement then in effect between Dimensional
and the Investment Manager and pursuant to Dimensional's expense reduction
agreement, the Investment Manger paid Dimensional: $213,232 during the year
ended December 31, 1992; $301,795 for the period ended August 31, 1993;
$504,966 for the fiscal year ended August 31, 1994; and $436,034 for the fiscal
year ended August 31, 1995.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal
underwriter for shares of the Trust and is the Trust's agent for the purpose of
the continuous offering of the Funds' shares. Each Fund pays the cost for the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under
the Distribution Agreement. Terms of continuation, termination and assignment
under the Distribution Agreement are identical to those described above with
respect to the Advisory Agreement.
CUSTODIAN AND FUND ACCOUNTANT
PNC Bank, National Association, at the Airport Business Center, 200
Stevens Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for
the Trust.
PFPC, Inc., at 103 Bellevue Parkway Wilmington, Delaware 19809, serves
as Fund Accountant for the Trust.
ACCOUNTANTS AND REPORTS
TO SHAREHOLDERS
The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial statements of each series of the Trust and
review certain regulatory reports and the
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<PAGE> 26
Trust's federal income tax return. Price Waterhouse LLP also performs other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Trust. Shareholders will be sent audited annual and unaudited
semi-annual financial statements. The address of Price Waterhouse LLP is 555
California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800
East, Washington, DC 20005, is counsel to the Trust.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Schwab 1000 Fund(R), the
Investment Manager seeks to obtain best price and execution. Subject to the
supervision of the Board of Trustees, the Investment Manager will generally
select brokers and dealers for all of the Funds primarily on the basis of the
quality and reliability of brokerage services, including execution capability
and financial responsibility. In assessing these criteria, the Investment
Manager will, among other things, monitor the performance of brokers effecting
transactions for a Fund to determine the effect, if any, the Fund's
transactions through those brokers have on the market prices of the stocks
involved. This may be of particular importance for the Schwab 1000 Fund's
investments in relatively smaller companies whose stocks are not as actively
traded as those of their larger counterparts. The Schwab 1000 Fund will seek
to buy and sell securities in a manner that causes the least possible
fluctuation in the prices of those stocks in view of the size of the
transactions.
In an attempt to obtain best execution for the Schwab 1000 Fund, the
Investment Manager may also place orders for NASDAQ/NMS stocks directly with
market makers or with third market brokers, Instinet or brokers on an agency
basis. Placing orders with third market brokers or through Instinet may enable
the Schwab 1000 Fund to trade directly with other institutional holders on a
net basis. At times, this may allow the Fund to trade larger blocks than would
be possible trading through a single market maker.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
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<PAGE> 27
In determining when and to what extent to use Schwab as its broker for
executing orders for the Schwab 1000 Fund on securities exchanges, the
Investment Manager will consider (if relevant) whether the compensation to be
paid Schwab will be (i) fair and reasonable, (ii) at least as favorable to the
Fund as commissions that would be charged by other qualified brokers having
comparable execution capabilities, and (iii) at least as favorable as
commissions contemporaneously charged by Schwab on comparable transactions for
its most favored unaffiliated customers. The Fund does not consider it
practicable or in the best interests of its shareholders to solicit competitive
bids for commission rates on each transaction. However, the Board of Trustees,
including a majority of the trustees who are not "interested persons" of Schwab
within the meaning of the 1940 Act, (i) has prescribed procedures designated to
provide that the Fund does not pay commissions that do not meet the standards
described above, (ii) reviews those procedures annually to determine whether
they remain adequate, and (iii) considers quarterly whether or not the
commissions charged by Schwab have met the standards.
Schwab's brokerage services to the Schwab 1000 Fund(R) are also
subject to Rule 11a2-2(T) under the Securities Exchange Act of 1934, as
amended. Rule 11a2-2(T) permits the Fund to use Schwab as a broker provided
certain conditions are met. Among these requirements are that the floor
brokerage element of portfolio transactions (that is, execution on the exchange
floor or through use of exchange facilities) be performed by members of the
exchange not associated with Schwab, that the orders to such members be
transmitted from off the exchange floor and that neither Schwab nor an
associated person of Schwab participates in the execution of the transaction
after the order has been so transmitted. In connection with transactions in
which Schwab acts as broker for the Schwab 1000 Fund, Schwab, while not
permitted to perform floor brokerage (which is undertaken by members selected
by Schwab who are not associated with that firm), still continues to bear
principal responsibility for determining important elements of overall
execution such as timing and order size, and also clears and settles such
transactions. Schwab pays the fees charged by those persons performing the
described floor brokerage elements. Schwab will not trade directly with the
Funds in any transactions in which Schwab or an affiliate acts as principal.
Brokerage Commissions. For the year ended December 31, 1992, the
Schwab 1000 Fund paid no brokerage commissions. For the period ended August
31, 1993, and the fiscal years ended August 31, 1994 and 1995, the Schwab 1000
Fund paid brokerage commissions of $120,199, $50,000, and $118,000,
respectively. Of these amounts, $111,528 (92.8% of the total amount), $42,000
(84% of the total amount), and $69,000 (58% of the total amount) were paid to
Schwab, an affiliated person of the Fund. The Government Bond Funds, Municipal
Bond Funds and California Municipal Bond Funds paid no
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<PAGE> 28
brokerage commissions for each such Fund's last three periods, respectively.
PORTFOLIO TURNOVER
For reporting purposes, each Fund's turnover rate is calculated by
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
owned by the Fund during the fiscal year. When making the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded. A 100% portfolio turnover rate would
occur, for example, if all portfolio securities (aside from short-term
securities) were sold and either repurchased or replaced once during the
fiscal year.
From time to time, each Fund may compare its portfolio turnover rate
with that of other mutual funds as reported by independent sources.
Schwab 1000 Fund. The Schwab 1000 Fund's portfolio turnover rates
were 3% for the fiscal year ended August 31, 1994 and 2% for the fiscal year
ended August 31, 1995.
The Government Bond Funds. The portfolio turnover rates for the
Schwab Long-Term Government Bond Fund for the fiscal years ended August 31,
1994 and 1995 were 123% and 240%, respectively. The portfolio turnover rates
for the Schwab Short/Intermediate Government Bond Fund for the fiscal years
ended August 31, 1994 and 1995 were 91% and 203%, respectively.
The Municipal Bond Funds. The portfolio turnover rates for the Schwab
Long-Term Tax-Free Bond for the fiscal years ended August 31, 1994 and 1995
were 62% and 70%, respectively. The portfolio turnover rates for the Schwab
Short/Intermediate Tax-Free Bond Fund for the fiscal years ended August 31,
1994 and 1995 were 19% and 35%, respectively.
The California Municipal Bond Funds. The portfolio turnover rates for
the Schwab California Long-Term Tax-Free Bond Fund for the fiscal years ended
August 31, 1994 and 1995 were 48% and 46%, respectively. The portfolio
turnover rates for the Schwab California Short/Intermediate Tax-Free Bond Fund
for the fiscal years ended August 31, 1994 and 1995 were 35% and 62%,
respectively.
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TAXES
FEDERAL INCOME TAX
It is the policy of each Fund to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Code.
By following this policy, each Fund expects to eliminate or reduce to a nominal
amount the federal income tax to which it is subject.
In order to qualify as a regulated investment company, each of the
Funds must, among other things, (1) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stocks, securities, foreign currencies or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in stocks, securities or
currencies; (2) derive less than 30% of its gross income from gains from the
sale or other disposition of certain assets (including stocks and securities)
held for less than three months; and (3) diversify its holdings so that at the
end of each quarter of its taxable year (i) at least 50% of the market value of
the Fund's total assets is represented by cash or cash items, United States
Government securities, securities of other regulated investment companies and
other securities limited, in respect of any one issuer, to a value not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of
its assets is invested in the securities of any one issuer (other than United
States Government securities or securities of any other regulated investment
company) or of two or more issuers that the Fund controls, within the meaning
of the Code, and that are engaged in the same, similar or related trades or
businesses. These requirements may restrict the degree to which a Fund may
engage in short-term trading and certain hedging transactions and may limit the
range of a Fund's investments. If a Fund qualifies as a regulated investment
company, it will not be subject to federal income tax on the part of its net
investment income and net realized capital gains, if any, which it distributes
to shareholders, provided that the Fund meets certain minimum distribution
requirements. To comply with these requirements, a Fund must distribute at
least (a) 90% of its "investment company taxable income" (as that term is
defined in the Code) and (b) 90% of the excess of its (i) tax-exempt interest
income over (ii) certain deductions attributable to that income (with certain
exceptions), for its taxable year. Each Fund intends to make sufficient
distributions to shareholders to meet these requirements.
The Code imposes a non-deductible excise tax on regulated investment
companies that do not distribute in a calendar year (regardless of whether they
otherwise have a non-calendar taxable year) an amount equal to 98% of their
"ordinary income" (as defined in the Code) for the calendar year plus 98% of
their
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<PAGE> 30
capital gain net income for the one-year period ending on October 31 of such
calendar year plus any undistributed amounts from prior years. For the
foregoing purposes, a Fund is treated as having distributed any amount on which
it is subject to income tax for any taxable year ending in such calendar year.
If the distributions during a calendar year were less than the required amount,
the Fund would be subject to a non-deductible excise tax equal to 4% of the
deficiency.
The Funds' transactions in futures contracts and options and certain
other investment and hedging activities of the Funds are subject to special tax
rules. In a given case, these rules may accelerate income to a Fund, defer its
losses, cause adjustments in the holding periods of the Fund's assets, convert
short-term capital losses into long-term capital losses or otherwise affect the
character of the Fund's income. These rules could therefore affect the amount,
timing and character of distributions to shareholders. Income earned as a
result of these transactions would, in general, not be eligible for the
corporate dividends received deduction when distributed to corporate
shareholders. The Funds will endeavor to make any available elections
pertaining to these transactions in a manner believed to be in the best
interest of the Funds and their shareholders.
Any dividends declared by the Funds in October, November or December
to shareholders of record during those months and paid during the following
January are treated, for tax purposes, as if they were received by each
shareholder on December 31 of the year declared. A Fund may adjust its
schedule for the reinvestment of distributions for the month of December to
assist in complying with the reporting and minimum distribution requirements of
the Code.
A Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends paid to any shareholder (1) who
fails to provide a correct taxpayer identification number certified under
penalty of perjury; (2) who is subject to withholding by the Internal Revenue
Service for failure to properly report all payments of interest or dividends;
or (3) who fails to provide a certified statement that he or she is not subject
to "backup withholding." This "backup withholding" is not an additional tax
and any amounts withheld may be credited against the shareholder's ultimate
U.S. tax liability.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts
and estates) generally are subject to U.S. withholding tax at the rate of 30%
(or a lower tax treaty rate) on distributions derived from net investment
income and short-term capital gains. Distributions to foreign shareholders of
long-term capital gains and any gains from the sale or other disposition of
shares of the Funds generally are not subject to U.S. taxation, unless the
recipient is an individual who meets the Code's definition of "resident alien."
Different tax consequences may result if the foreign shareholder is engaged in
a trade or business within the
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United States. In addition, the tax consequences to a foreign shareholder
entitled to claim the benefits of a tax treaty may be different than those
described above. Distributions by a Fund may also be subject to state, local
and foreign taxes, and their treatment under applicable tax laws may differ
from the federal income tax treatment.
SCHWAB LONG-TERM TAX-FREE BOND FUND,
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND,
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND,
AND SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
The Code permits a regulated investment company that invests
at least 50% of its assets at the close of each quarter in Municipal Securities
to pass through to its investors, on a tax-exempt basis, net Municipal
Securities interest income. An exempt-interest dividend is any dividend or
part thereof (other than a capital gain dividend) paid by the Schwab Long-Term
Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond Fund, Schwab
California Long-Term Tax-Free Bond Fund, and Schwab California
Short/Intermediate Tax-Free Bond Fund and designated as an exempt-interest
dividend in a written notice mailed to shareholders after the close of such
Fund's taxable year, but not to exceed in the aggregate the net Municipal
Securities interest income received by each such Fund during the taxable year.
The percentage of the total dividends paid during any taxable year that is
designated as exempt-interest dividends will be uniform throughout such year
for all shareholders receiving dividends from each Fund during such year, and
may differ from the percentage of exempt income actually received by a Fund
during the period for which the Shares were held. If for any taxable year the
Schwab Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond
Fund, Schwab California Long-Term Tax-Free Bond Fund, or Schwab California
Short/Intermediate Tax-Free Bond Fund does not qualify for the special federal
tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal tax at regular corporate rates (without any
deduction for distributions to its shareholders) when distributed, and
Municipal Securities interest income, although not taxed to the Funds, would be
taxable to shareholders. To the extent dividends paid to shareholders are
derived from taxable interest or short-term or long-term capital gains, such
dividends will be subject to federal income tax whether such dividends are paid
in the form of cash or additional shares.
A shareholder should consult his or her own tax adviser with respect
to whether exempt-interest dividends would be excludable from gross income if
the shareholder were treated as a "substantial user" of facilities financed by
an obligation held by either Fund or a "related person" to such user under the
Code. Any loss on the sale or exchange of any share held for 6 months or less
will be disallowed to the extent of the amount of the exempt-interest dividend
received with respect to such share. The U.S. Treasury Department is
authorized to issue regulations reducing the period to not less than 31 days
for certain regulated investment companies. No such regulations have been
issued as of the date of this Statement of Additional Information.
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All or part of interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of a Fund will not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of that Fund's total distributions (excluding distributions of the excess of
net long-term capital gains over net short-term capital losses) paid to the
shareholder that are exempt-interest dividends. Under rules used by the
Internal Revenue Service, the purchase of shares of a Fund may be considered to
have been made with borrowed funds even though such funds are not directly
traceable to the purchase of the shares.
This discussion of federal income taxation presented above only
summarizes some of the important federal tax considerations generally affecting
purchasers of Fund shares. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund and its shareholders,
and the discussion is not intended as a substitute for careful tax planning.
Accordingly, prospective investors (particularly those not residing or
domiciled in the United States) should consult their own tax advisers regarding
the consequences of investing in a Fund.
STATE OF CALIFORNIA TAXES
With respect to each California Municipal Bond Fund, if, at the close
of each quarter of its taxable year, at least 50% of the value of the total
assets of the Fund consists of obligations the interest on which is exempt from
California personal income taxation under the Constitution or laws of
California or of the United States ("California Exempt Obligations"), then the
Fund will be qualified to pay dividends exempt from State of California
personal income tax to its non-corporate shareholders (hereinafter referred to
as "California exempt-interest dividends"). The California Municipal Bond
Funds intend to qualify under the above requirement so that they can pay
California exempt-interest dividends. If a California Municipal Bond Fund
fails to so qualify, no part of its dividends will be exempt from State of
California personal income tax.
Not later than 60 days after the close of its taxable year, each
California Municipal Bond Fund will notify each shareholder of the portion of
the dividends paid by it to the shareholder with respect to such taxable year
which is exempt from State of California personal income tax. The total amount
of California exempt-interest dividends paid by a California Municipal Bond
Fund to all of its shareholders with respect to any taxable year cannot exceed
the amount of interest received by the Fund during such year on California
Exempt Obligations, less any expenses or expenditures (including any
expenditures attributable to the acquisition of additional securities for the
California Municipal Bond Funds) that are deemed to have been paid from such
interest. Dividends paid by the California Municipal Bond Funds in excess of
this limitation will be subject to State of California personal income tax.
For purposes of this limitation, expenses or
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other expenditures paid during any year generally will be deemed to have been
paid with funds attributable to interest received by the Fund from California
Exempt Obligations for such year in the same ratio as such interest from
California Exempt Obligations for such year bears to the total gross income
earned by the Fund for the year. The effect of this accounting convention is
that amounts of interest from California Exempt Obligations received by the
California Municipal Bond Funds that would otherwise be available for
distribution as California exempt-interest dividends will be reduced by the
expenses and expenditures deemed to have been paid from such amounts.
To the extent, if any, dividends paid to shareholders are derived from
long-term and short-term capital gains, such dividends will not constitute
California exempt-interest dividends. Rules similar to those regarding the
treatment of such dividends for federal income tax purposes are also applicable
for State of California personal income tax purposes. Moreover, interest on
indebtedness incurred by a shareholder to purchase or carry shares of a
California Municipal Bond Fund is not deductible for State of California
personal income tax purposes if the Fund distributes California exempt-interest
dividends to the shareholder during his or her taxable year.
The foregoing is only a summary of some of the important State of
California personal income tax considerations generally affecting the
California Municipal Bond Funds and their shareholders. No attempt is made to
present a detailed explanation of the State of California personal income tax
treatment of the California Municipal Bond Funds or their shareholders, and
this discussion is not intended as a substitute for careful planning. Further,
it should be noted that the portions of the California Municipal Bond Funds'
dividends constituting California exempt-interest dividends are excludable from
income for State of California personal income tax purposes only. Any
dividends paid to shareholders of the California Municipal Bond Funds subject
to State of California franchise or corporate income tax will be taxed as
ordinary dividends to such shareholders, notwithstanding that all or a portion
of such dividends are exempt from State of California personal income tax.
Accordingly, potential investors in the California Municipal Bond Funds,
including, in particular, corporate investors that may be subject to California
franchise or corporate income tax, should consult their tax advisers with
respect to the application of such tax to the receipt of the California
Municipal Bond Funds' dividends and as to their own State of California tax
situation, in general.
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SHARE PRICE CALCULATION
Each Fund's net asset value per share is determined each day the New
York Stock Exchange is open for trading as of 4:00 p.m., Eastern time.
Currently, the New York Stock Exchange is closed on the following holidays:
New Year's Day (observed), Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. From time to
time, each Fund may report its net asset value per share over a specified
period. Each Fund's net asset value, for the periods set forth, may be
compared to net asset values for other mutual funds with similar investment
objectives as reported by independent sources.
TOTAL RETURN AND YIELD
STANDARDIZED TOTAL RETURN
Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in the
Fund made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, the
Fund assumes the reinvestment of all distributions at net asset value on
applicable reinvestment dates.
<TABLE>
<CAPTION>
Average annual total return from
Total return for the fiscal year commencement of operations to
ended August 31, 1995 August 31, 1995
-------------------------------- --------------------------------
<S> <C> <C>
Schwab 1000 Fund(R) 21.23% 12.66%
Schwab Long-Term Government Bond Fund 13.03% 6.01%
Schwab Short/Intermediate Government 6.61% 5.78%
Bond Fund
Schwab Long-Term Tax-Free Bond Fund 7.76% 6.24%
Schwab Short/Intermediate Tax-Free Bond 6.23% 4.43%
Fund
Schwab California Long-Term Tax-Free 6.98% 7.42%
Bond Fund
Schwab California Short/Intermediate 6.17% 4.23%
Tax-Free Bond Fund
</TABLE>
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NONSTANDARDIZED TOTAL RETURN
Nonstandardized total returns for a Fund differ from standardized
total returns in that they relate to periods other than the period for
standardized total return and/or that they represent aggregate (rather than
average) total return.
In addition, an after-tax total return for the Schwab 1000 Fund(R) may
be calculated by taking the Fund's standardized or non-standardized total
return and subtracting applicable Federal taxes from the portion of the
Fund's total return attributable to capital gain distributions and ordinary
income. This after-tax total return may be compared to that of other mutual
funds with similar investment objectives as reported by independent sources.
In addition, the Schwab 1000 Fund may report the percentage of the
Fund's standardized or non-standardized total return which would be paid in
federal taxes annually (at the applicable federal personal income and capital
gains tax rates) before redemption of Fund shares. This proportion may be
compared to that of other mutual funds with similar investment objectives as
reported by independent sources.
YIELD
A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Fund over a specific thirty day period. This
net investment income is then annualized, which means that the net investment
income generated during the 30-day period is assumed to be generated in each
30-day period over an annual period, and is shown as a percentage of the
investment.
<TABLE>
<CAPTION>
Fund 30-day period ended August 31, 1995
---- ----------------------------------
<S> <C>
Schwab Long-Term Government Bond Fund 6.91%
Schwab Short/Intermediate Government Bond Fund 5.66%
Schwab Long-Term Tax-Free Bond Fund 5.43%
Schwab Short/Intermediate Tax-Free Bond Fund 3.94%
Schwab California Long-Term Tax-Free Bond Fund 5.61%
Schwab California Short/Intermediate Tax-Free Bond Fund 4.30%
</TABLE>
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<PAGE> 36
EFFECTIVE YIELD
A Fund's effective yield is calculated similarly, but the net
investment income earned by the investment is assumed to be compounded monthly
when annualized. The effective yield will be slightly higher than the yield
due to this compounding effect.
TAX EQUIVALENT YIELD AND
TAX EQUIVALENT EFFECTIVE YIELD
The tax equivalent yield of the Municipal Bond Funds and the
California Municipal Bond Funds are calculated by dividing that portion of the
applicable fund's yield (computed as described above) that is tax-exempt by an
amount equal to one minus the applicable effective tax rate, and adding the
result to that portion, if any, of the yield of the Fund that is not
tax-exempt. For the Municipal Bond Funds, the maximum federal marginal rate
of 39.6% is normally used; for the California Municipal Bond Funds, a combined
rate of the maximum federal marginal rate of 39.6% and the California marginal
rate of 11% is normally used.
<TABLE>
<CAPTION>
Taxable equivalent yield
for 30-day period ended
Fund August 31, 1995
---- ------------------------
<S> <C>
Schwab Long-Term Tax-Free Bond Fund 8.99%
Schwab Short/Intermediate Tax-Free Bond Fund 6.52%
Schwab California Long-Term Tax-Free Bond Fund 10.44%
Schwab California Short/Intermediate Tax-Free Bond Fund 8.00%
</TABLE>
Tax equivalent effective yields are computed in the same manner as tax
equivalent yields, except that effective yield is substituted for yield in the
calculation. In calculating tax equivalent yields and effective yields the
California Municipal Bond Funds generally assume an effective tax rate
(combining the federal 39.6% rate and the California 11% rate, and assuming the
taxpayer deducts California state taxes paid) of 46.24%. The effective tax
rates used in determining such yields do not reflect the tax costs resulting
from the full or partial loss of the benefits of personal exemptions, itemized
deductions and California exemption credits that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
$117,950 (for joint returns) or $58,975 (for separate returns) for 1996.
Actual tax equivalent yields and tax equivalent effective yields may be higher
for taxpayers subject to the loss of these benefits than the rates reported by
the Funds.
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<PAGE> 37
TAX-EXEMPT VERSUS TAXABLE YIELD
Investors may want to determine which investment, tax-exempt or
taxable, will provide a higher after-tax return. To determine the tax
equivalent yield, or tax equivalent effective yield, simply divide the yield
or effective yield of the Municipal Bond Funds or the California Municipal Bond
Funds by 1 minus your marginal federal tax rate (or combined state and federal
tax rate in the case of the California Municipal Bond Funds). Note, however,
that as discussed above full or partial loss by certain investors of the
described federal tax benefits could cause the resulting figure to understate
the after-tax return produced by the Fund in question.
From time to time, each Fund may report on the dividends paid to
shareholders over a specified period of time.
SCHWABFUNDS(R) INVESTMENT STRATEGIES
INDEXING AND THE SCHWAB 1000 INDEX(R) AND FUND
The returns produced by the United States stock market during the 25
years ending December 31, 1994 have been exceeded by those of very few types of
securities investments. Because the unmanaged performance of the U.S. stock
market has often proven superior to that of many individually selected stock
portfolios, a growing percentage of assets invested in the equity markets are
being placed in "index" portfolios. Institutional investors often devote a
substantial percentage of their assets to indexed strategies.
The historical superiority of a long-term investment in a group of
common stocks representative of the stock market as a whole is illustrated in
the graph and table below. It may be seen that the cumulative 25 year total
return of the Schwab 1000 Index significantly exceeds that of United States
Treasury Bills (obligations which when issued have maturities of one year or
less), and long-term Government Bonds (bonds issued by the United States
Treasury which at issue have maturities of at least 10 but no more than 30
years) and is well above the rate of inflation as represented by the Consumer
Price Index ("CPI"). While common stock prices fluctuated during the years
1978 through 1994, they were substantially higher at the end of the period than
at the beginning. The historical data presented is not indicative of future
results.
Schwab 1000 Index data assumes the reinvestment of dividends, but does
not reflect deductions for administrative and management costs and expenses.
The Fund will be subject to these costs and expenses. In addition, various
factors may cause the Fund's performance to be higher or lower than that of the
Index. (See "Investment Objective and Policies.") The Schwab 1000 Index was
first made available to the public on February 1, 1991.
An index typically tracks the performance of a group of securities
selected to represent a particular market, and is most often used to gauge that
market's performance. The Dow Jones Industrial Average ("DJIA") and Standard &
Poor's 500 Index(R) ("S&P 500") are two indices designed to measure the
performance of United States stocks. As of December 15, 1995, the market
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<PAGE> 38
capitalization of the stocks included in these indices represent approximately
17.36% and 72.34%, respectively, of the U.S. stock market's total value. When
investment managers invest indexed separate accounts or index fund assets, they
attempt to replicate the performance of the applicable target index by holding
all or a representative sample of the securities included in the index.
The Schwab 1000 Index is a broad-based stock market index which
contains the common stocks of the 1,000 largest operating companies (i.e.,
non-investment companies) incorporated in the United States. As the stocks
contained in the index represent about 85% of the total market capitalization
of all U.S. companies, as represented by the Wilshire 500 Index, the Schwab
1000 Index provides a reliable measure of broad market performance and can
serve as a benchmark against which individual investors can compare the
performance of their equity investments. Relative to some indices that
primarily track one group of stocks, and as a result do not capture movements
in other areas of the market, the Schwab 1000 Index(R), because it contains the
stocks of the more established blue-chip companies as well as those of
relatively smaller companies, reflects an expanded breadth of market coverage.
This distinction is important because historically the stocks of smaller
companies have out-performed those of their blue-chip counterparts in some
years, while the reverse has been true in other years. Of course, past
performance may not necessarily be indicative of future results.
From time to time, the Schwab 1000 Fund may compare the historical
performance of the Schwab 1000 Index to the historical performance of various
other indices, including the S&P 500, as reported by independent sources.
Charles R. Schwab, a veteran investor, was instrumental in developing
the Schwab 1000 Fund(R). The investment objective of the Fund, which is
designed to make indexed investing available with a high level of convenience
and economy, is to match the total return of the Schwab 1000 Index.
The Schwab 1000 Fund is managed to offset capital gains with capital
losses in order to minimize the distribution of capital gains to shareholders.
This special feature of the Schwab 1000 Fund can make a real difference in an
investor's after-tax return, especially if the investor is in a high tax
bracket. The Schwab 1000 Fund has adopted a number of policies that should
cause its portfolio turnover rate to be below the portfolio turnover rate of
many other mutual funds. A lower portfolio turnover rate acts to minimize
associated transaction costs as well as the level of realized capital gains.
By avoiding, where possible, the distribution of capital gains to shareholders,
the Schwab 1000 Fund helps to build the value of an investor's shares and defer
payment of capital gains taxes until redemption of the those shares. Current
tax liability for capital gains should be reduced and total return increased by
these policies.
The Schwab 1000 Fund may, from time to time, refer to recent studies
that analyze certain techniques and strategies which the Schwab 1000 Fund uses.
In addition, the Schwab 1000 Fund may, from time to time, promote the
advantages of investing in a series that is part of a large, diverse mutual
fund complex.
38
<PAGE> 39
CUMULATIVE RETURNS
January 1979 to December 1994
[Line graph of cumulative returns from January 1979
to December 1994 comparing the Following: Schwab 1000 Index,
S&P 500 Index, 3-Month CD's, Corporate Bonds, Treasury Bills,
and Inflation (CPI)]
<TABLE>
<CAPTION>
SCHWAB 1000 S&P 500 3 MONTH CORPORATE TREASURY INFLATION
INDEX INDEX CD's BONDS BILLS (CPI)
<S> <C> <C> <C> <C> <C> <C>
1979 21.34% 18.30% 11.22% -2.12% 10.04% 13.29%
1980 61.20% 56.43% 25.69% -2.42% 22.79% 27.46%
1981 54.95% 48.49% 45.68% 0.49% 39.98% 38.82%
1982 87.60% 80.36% 63.50% 39.90% 54.96% 44.14%
1983 128.48% 120.86% 78.33% 52.89% 68.32% 49.61%
1984 142.83% 134.70% 96.80% 78.30% 84.43% 55.53%
1985 221.19% 209.19% 112.65% 121.21% 98.23% 61.46%
1986 277.88% 266.94% 126.49% 157.73% 110.04% 63.24%
1987 289.34% 286.25% 142.02% 164.30% 122.26% 70.38%
1988 355.39% 350.40% 160.70% 188.66% 137.07% 77.99%
1989 492.10% 493.11% 184.36% 229.04% 156.34% 86.26%
1990 465.16% 474.63% 207.57% 252.58% 175.61% 97.62%
1991 656.08% 649.79% 225.50% 317.84% 190.55% 103.71%
1992 723.39% 706.94% 237.51% 354.18% 200.56% 109.59%
1993 807.71% 788.19% 248.26% 409.44% 209.57% 115.36%
1994 812.12% 799.80% 264.41% 389.44% 222.80% 121.11%
</TABLE>
39
<PAGE> 40
ASSET ALLOCATION STRATEGIES USING SCHWABFUNDS(R)
SchwabFund Shareholders may wish to invest in the SchwabFunds as part
of their personal asset allocation plan. An asset allocation program is
available through Schwab. This program may help shareholders select
investments, including investments in SchwabFunds, that match their individual
investment needs. The shareholders' personal investment plan is based on a
number of factors including personal financial situation, time horizon,
investment objectives and goals, and risk tolerance.
ACCESS TO SCHWAB'S MUTUAL
FUND ONESOURCE SERVICE(TM)
With Schwab's Mutual Fund OneSource Service(TM) ("OneSource"), a
shareholder can invest in over 200 mutual funds from many fund companies,
subject to the following. If a shareholder makes five or more short-term
redemptions of OneSource mutual funds (other than the SchwabFunds) within any
12-month period, a fee will be charged on all future trades. A short-term
redemption in this context refers to the sale of mutual fund shares held for
six months or less. Some mutual funds available through OneSource may charge
fees permitted under Rule 12b-1 in excess of one quarter of one percent per
year. Schwab reserves the right to modify OneSource's terms and conditions at
any time. For more information, a shareholder should contact their Schwab
office during its regular business hours or 800-2 NO-LOAD, 24 hours a day.
From time to time, the Schwab 1000 Fund(R) may include discussions in
advertisements of the income tax savings shareholders may experience as a
result of the Schwab 1000 Fund's policy of limiting portfolio trading in order
to reduce capital gains. This information may be supplemented by presentations
of statistical data illustrating the extent of such income tax savings and the
impact of such savings on the yield and/or total return of the Schwab 1000
Fund. In addition, such advertisements may include comparisons of the Schwab
1000 Fund's performance against that of investment products that do not employ
the Schwab 1000 Fund's policy of seeking to limit capital gains.
The Schwab 1000 Fund is intended to make indexed investing easily
available to Schwab customers with the highest level of convenience and economy
thereby facilitating their ability to participate in the long-term performance
of the United States stock market.
40
<PAGE> 41
GENERAL INFORMATION
The Trust is generally not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
removal of trustees if a meeting is requested in writing by a shareholder or
shareholders who beneficially own(s) 10% or more of the Trust's shares; (2)
adoption of any contract for which shareholder approval is required by the 1940
Act; (3) any termination of the Trust to the extent and as provided in the
Declaration of Trust; (4) any amendment of the Declaration of Trust (other than
amendments changing the name of the Trust or any of its investment portfolios,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); (5) determining
whether a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or the
shareholders, to the same extent as the stockholders of a Massachusetts
business corporation; and (6) such additional matters as may be required by
law, the Declaration of Trust, the Bylaws or any registration of the Trust with
the SEC or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to a Fund's fundamental investment
objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing trustees and until the election and
qualification of his or her successor or until death, resignation, retirement
or removal by a majority vote of the shares entitled to vote (as described
below) or of a majority of the Trustees. In accordance with the 1940 Act (i)
the Trust will hold a shareholder meeting for the election of trustees when
less than a majority of the trustees have been elected by shareholders, and
(ii) if, as a result of a vacancy in the Board of Trustees, less than
two-thirds of the trustees have been elected by the shareholders, that vacancy
will be filled by a vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such
for at least six months and who hold shares constituting at least 1% of the
Trust's outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more trustees, the Trust has undertaken
to disseminate appropriate materials at the expense of the requesting
shareholders.
The Bylaws provide that the presence at a shareholder meeting in
person or by proxy of at least 30% of the shares entitled to vote on a matter
shall constitute a quorum, unless otherwise provided by the 1940 Act or other
applicable law. Thus, even if less than a majority of shareholders were
represented, a meeting of the Trust's shareholders could occur. Attending
shareholders would in such case be permitted to take action not requiring the
vote of more than a majority of a quorum. Some matters requiring a larger vote
under the Declaration of Trust, such as
41
<PAGE> 42
termination or reorganization of the Trust, and certain amendments of the
Declaration of Trust, could not be decided at such a meeting; nor could matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act. The Declaration of Trust
specifically authorizes the Board of Trustees to terminate the Trust (or any of
its investment portfolios) by notice to the shareholders without shareholder
approval.
Under Massachusetts law, shareholders of a Massachusetts business
trust could, under certain circumstances, be held personally liable for the
Trust's obligations. The Declaration of Trust, however, disclaims shareholder
liability for the Trust's acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or the trustees. In addition, the Declaration of Trust
provides for indemnification out of the property of an investment portfolio in
which a shareholder owns or owned shares for all losses and expenses of such
shareholder or former shareholder if he or she is held personally liable for
the obligations of the Trust solely by reason of being or having been a
shareholder. Moreover, the Trust will be covered by insurance which the
trustees consider adequate to cover foreseeable tort claims.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote, because it is limited to
circumstances in which a disclaimer is inoperative and the Trust itself is
unable to meet its obligations.
For further information, please refer to the registration statement
and exhibits for the Trust on file with the SEC in Washington, D.C. and
available upon payment of a copying fee. The statements in the Prospectus and
this Statement of Additional Information concerning the contents of contracts
or other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
42
<PAGE> 43
SCHWABFUNDS(R). SchwabFunds offers a variety of series and classes of
shares of beneficial interest to help you with your investment needs.
EQUITY FUNDS
Schwab 1000 Fund(R)(1)
Schwab International Index Fund(TM)(2)
Schwab Small-Cap Index Fund(R)(2)
Schwab Asset Director(R)-High Growth Fund(2)
Schwab Asset Director(R)-Balanced Growth Fund(2)
Schwab Asset Director(R)-Conservative Growth Fund(2)
FIXED INCOME FUNDS(1)
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund(3)
Schwab California Long-Term Tax-Free Bond Fund(3)
MONEY MARKET FUNDS(4)
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(TM)
Schwab Tax-Exempt Money Fund-Sweep Shares
Schwab Tax-Exempt Money Fund-Value Advantage Shares(TM)
Schwab California Tax-Exempt Money Fund-Sweep Shares(3)
Schwab California Tax-Exempt Money Fund-Value Advantage Shares(TM)(3)
Schwab Retirement Money Fund(R)(5)
Schwab Institutional Advantage Money Fund(TM)(5)
Schwab New York Tax-Exempt Money Fund-Sweep Shares(6)
Schwab New York Tax-Exempt Money Fund-Value Advantage Shares(TM)(6)
1 The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of the Trust.
2 The Funds are separate investment portfolios of Schwab Capital Trust.
3 Available only to California residents and residents of selected other
states.
4 All listed money market funds are separate investment portfolios of The
Charles Schwab Family of Funds.
5 Designed for institutional investors only.
6 Available only to New York residents and residents of selected other
states.
43
<PAGE> 44
PURCHASE AND REDEMPTION OF SHARES
Each Fund's minimum initial investment requirement is $1,000 ($500 for
Custodial Accounts, Individual Retirement Accounts and certain other retirement
plans). Subsequent investments of $100 or more may be made. These minimum
investment requirements may be changed at any time and are not applicable to
certain types of investors. The Trust may waive the minimums for purchases by
trustees, directors, officers or employees of the Trust, Schwab, or the
Investment Manager.
The Trust has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of its net assets at the
beginning of such period. This election is irrevocable without the SEC's prior
approval. Redemption requests in excess of the stated limits may be paid, in
whole or in part, in investment securities or in cash, as the Trust's Board of
Trustees may deem advisable; however, payment will be made wholly in cash
unless the Board of Trustees believes that economic or market conditions
exist that would make such a practice detrimental to the best interests of the
Fund. If redemption proceeds are paid in investment securities, such
securities will be valued as set forth in the Prospectus of the Fund affected
under "Share Price Calculation" and a redeeming shareholder would normally
incur brokerage expenses if he or she converted the securities to cash.
OTHER INFORMATION
The Prospectuses of the Funds and this Statement of Additional
Information do not contain all the information included in the Registration
Statement filed with the SEC under the Securities Act of 1933, as amended, with
respect to the securities offered by the Prospectuses. Certain portions of the
Registration Statement have been omitted from the Prospectuses and this
Statement of Additional Information pursuant to the rules and regulations of
the SEC. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
This Statement of Additional Information does not constitute an
offering by the Trust, any series thereof, or by the Distributor in any
jurisdiction in which such offering may not be lawfully made.
44
<PAGE> 45
APPENDIX - RATINGS OF INVESTMENT SECURITIES
From time to time, each Fund may report the percentage of its assets
which fall into the rating categories set forth below.
BONDS
MOODY'S INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality AAA.
These bonds carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
extraordinarily stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of these issues.
Bonds carrying an Aa designation are deemed to be of high quality by all
standards. Together with Aaa rated bonds, they comprise what are generally
known as high grade bonds. Aa bonds are rated lower than the best bonds
because they may enjoy relatively lower margins of protection, fluctuations of
protective elements may be of greater amplitude or there may be other factors
present which make them appear to be subject to somewhat greater long-term
risks. A rated bonds are considered as upper-medium grade obligations as they
possess many favorable investment attributes. Bonds designated Baa are
considered medium grade in that they are not highly protected nor poorly
secured. Interest payments and principal security appear to be adequate at the
present, but they may lack certain protective elements or be characteristically
unreliable over any great length of time. Baa bonds do not have any outstanding
investment characteristics and do have speculative characteristics.
STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree. A
ratings are given to debt which has a strong capacity to pay interest and repay
principal but is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than higher rated debt. BBB debt
indicates the issuer is regarded by S & P as having an adequate capacity to pay
interest and repay principal. These securities appear to have adequate
protection, however adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
in this category than in higher categories.
DUFF & PHELPS CREDIT RATING CO.
Duff confers an AAA designation to bonds of issuers with the highest
credit quality. The risk factors associated with these bonds are negligible,
being only slightly more than for risk-free United States Treasury debt. AA
rated bonds are of high credit quality and have strong
45
<PAGE> 46
protection factors. The risks associated with them are modest but may vary
slightly from time to time because of economic conditions. An A rating
indicates that the protection factors are average but adequate. The risk
factors, however, are more variable and greater in periods of economic stress.
BBB rated debt has protection factors that are below average but still
sufficient for prudent investment. There is considerable variability in the
risk of BBB rated debt during economic cycles.
FITCH INVESTOR SERVICES, INC.
AAA is the highest rating Fitch assigns to bonds, and indicates the
obligor's exceptionally strong ability to pay interest and repay principal.
Bonds which Fitch considers of very high credit quality, and the obligor's
ability to pay interest and repay principal is strong, although not as strong
as AAA, is rated AA. An A rating is given to show high credit quality and the
issuer's ability to pay interest and repay principal is strong, but there is
more vulnerability to economic conditions and circumstances than higher rated
debt. BBB bonds are considered investment grade, where the issuer has adequate
ability to pay interest and repay principal. Bonds rated BBB are more
susceptible to adverse changes in economic conditions and circumstances, thus
these bonds are more likely to fall below investment grade or have the
timeliness of their payments impaired.
SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
MOODY'S INVESTORS SERVICE
Short-term notes/variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality, enjoying
strong protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations
rated MIG-2/VMIG-3 are of high quality and enjoy ample margins of protection
although not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a
very strong capacity to pay principal and interest. Issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
S&P's determination that an issuer has a satisfactory capacity to pay principal
and interest is denoted by an SP-2 rating.
IBCA
Obligations supported by the highest capacity for timely repayment are
rated A1+. An A1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated A2 are supported by a
strong capacity for timely repayment, although adverse changes in business,
economic, or financial conditions may affect this capacity.
46
<PAGE> 47
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service ("Moody's"). Issuers (or related supporting institutions) of
commercial paper with this rating are considered to have a superior ability to
repay short-term promissory obligations. Issuers (or related supporting
institutions) of securities rated Prime-2 are viewed as having a strong
capacity to repay short-term promissory obligations. This capacity will
normally be evidenced by many of the characteristics of issuers whose
commercial paper is rated Prime-1 but to a lesser degree.
STANDARD & POOR'S CORPORATION
A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates either an overwhelming or very strong degree of safety regarding
timely payment of principal and interest. Issues determined to possess
overwhelming safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is strong, but the relative degree of
safety is not as high as for issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Duff-1 is the highest commercial paper rating assigned by Duff &
Phelps, Credit Rating Co. ("Duff"). Three gradations exist within this rating
category: A Duff-1+ rating indicates the highest certainty of timely payment
(issuer short-term liquidity is found to be outstanding and safety is deemed
to be just below that of risk-free short-term U.S. Treasury obligations), a
Duff-1 rating signifies a very high certainty of timely payment (issuer
liquidity is determined to be excellent and risk factors are considered minor)
and a Duff-1- rating denotes high certainty of timely payment (issuer liquidity
factors are strong and risk is very small). A Duff-2 rating indicates a good
certainty of timely payment. Liquidity factors and company fundamentals are
sound and risk factors are small.
FITCH INVESTORS SERVICE, INC.
F-1+ is the highest category, and indicates the strongest degree of
assurance for timely payment. Issues rated F-1 reflect an assurance of timely
payment only slightly less than issues rated F-1+. Issues assigned an F-2
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues in the first two rating
categories.
47
<PAGE> 48
COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS
AND DEPOSIT OBLIGATIONS ISSUED BY BANKS
THOMSON BANKWATCH (TBW)
TBW-1 is the highest category and indicates the degree of safety
regarding timely repayment of principal and interest is very strong. TBW-2 is
the second highest category and while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
48
<PAGE> 49
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
COMMON STOCK--99.3%
3COM Corp.* 24,800 $ 964
ADC Telecommunications, Inc.* 9,600 370
ADVANTA Corp. Class A 6,100 254
ADVANTA Corp. Class B 4,800 179
AES Corp.* 10,359 193
AFLAC Inc. 14,950 611
AGCO Corp. 3,300 160
ALLTEL Corp. 32,800 927
ALZA Corp.* 11,600 276
AMBAC Inc. 5,300 224
AMP Inc. 33,700 1,369
AMR Corp.* 13,400 945
ARCO Chemical Co. 16,600 801
AST Research, Inc.* 1,124 15
AT&T Capital Corp. 6,900 218
AT&T Corp. 258,117 14,584
Abbott Laboratories 130,300 5,049
Acclaim Entertainment, Inc.* 7,000 178
Adaptec, Inc.* 9,200 391
Adobe Systems Inc. 10,900 555
Adtran, Inc.* 5,600 174
Advanced Micro Devices, Inc. 18,000 608
Aetna Life & Casualty Co. 19,400 1,324
Ahmanson (H.F.) & Co. 17,800 423
Air Products & Chemicals,
Inc. 17,200 922
Air Touch Communications* 117,500 3,819
Airgas, Inc.* 4,300 118
Albemarle Corp. 9,400 154
Alberto-Culver Co. Class A 1,500 38
Alberto-Culver Co. Class B
(Convertible) 4,500 128
Albertson's, Inc. 42,900 1,367
Alco Standard Corp. 9,500 765
Alexander & Alexander
Services Inc. 6,500 150
Alexander & Baldwin, Inc. 6,700 154
Alleghany Corp. 1,040 176
Allegheny Ludlum Corp. 10,000 210
Allegheny Power System, Inc. 21,100 514
Allen Group Inc.* 4,000 131
Allergan, Inc. 9,700 295
Alliance Semiconductor Corp.* 5,700 224
AlliedSignal Inc. 47,300 2,099
Allmerica Property & Casualty
Companies, Inc. 8,700 210
Allstate Financial Corp. 119,124 4,035
Altera Corp.* 6,200 388
Alumax Inc.* 6,500 222
Aluminum Co. of America 29,700 1,697
AmSouth Bancorporation 8,200 306
Amdahl Corp.* 16,100 147
Amerada Hess Corp. 16,600 786
America Online, Inc.* 6,800 448
American Brands, Inc. 30,100 1,264
American Electric Power Co.,
Inc. 30,600 1,044
American Express Co. 81,100 3,274
American Financial Group,
Inc. 6,900 213
American General Corp. 34,600 1,220
American Greetings Corp.
Class A 11,700 361
American Home Products Corp. 50,600 3,896
American International Group,
Inc. 77,325 6,234
American National
Insurance Co. 3,900 224
American Power Conversion
Corp.* 14,000 235
American Re Corp. 6,800 272
American Stores Co. 27,700 814
American Water Works
Co., Inc. 4,800 143
Ameritech Corp. 89,800 4,602
Amgen Inc.* 42,600 2,042
Amoco Corp. 81,000 5,164
Amphenol Corp. Class A* 6,500 159
Anadarko Petroleum Corp. 8,500 406
Analog Devices, Inc.* 11,200 388
Andrew Corp.* 5,750 337
Anheuser-Busch Companies,
Inc. 42,200 2,411
Anixter International, Inc.* 4,300 162
Aon Corp. 17,350 677
Apache Corp. 10,500 306
Apple Computer, Inc. 19,700 848
Applied Materials, Inc.* 14,500 1,512
Archer-Daniels-Midland Co. 85,361 1,419
Argonaut Group, Inc. 3,200 97
Armstrong World Industries,
Inc. 5,600 321
Arrow Electronics, Inc. 9,000 488
Arrow International, Inc. 3,100 126
Arvin Industries, Inc. 1,300 28
Asarco Inc. 5,800 188
Ascend Communications, Inc.* 3,600 232
Ashland, Inc. 11,100 364
Associated Group Inc.
Class B* 1,200 25
Atlanta Gas Light Co. 3,800 140
Atlantic Energy, Inc. 7,800 148
Atlantic Richfield Co. 26,100 2,848
Atlantic Southeast Airlines,
Inc. 5,000 124
Atmel Corp.* 19,200 606
AutoZone, Inc.* 25,500 685
Autodesk, Inc. 7,200 333
Automatic Data Processing,
Inc. 23,500 1,528
Avery Dennison Corp. 7,900 324
Avnet, Inc. 6,100 314
Avon Products, Inc. 10,400 735
BFGoodrich Co. 3,900 232
BHC Communications, Inc.
Class A 3,700 336
BIC Corp. 3,700 147
BMC Software, Inc.* 7,600 323
Baby Superstore, Inc.* 2,900 136
Baker Hughes Inc. 21,200 477
Ball Corp. 4,400 150
Baltimore Gas & Electric Co. 25,650 673
Banc One Corp. 65,110 2,189
Bancorp Hawaii, Inc. 6,175 207
Bandag, Inc. 4,000 238
Bandag, Inc. Class A 1,800 99
Bank South Corp. 7,500 171
Bank of Boston Corp. 17,100 752
Bank of New York Co., Inc. 31,600 1,375
BankAmerica Corp. 61,395 3,469
</TABLE>
See accompanying Notes to Financial Statements.
49
<PAGE> 50
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Bankers Life Holdings
Corporation 6,900 $ 131
Bankers Trust New York Corp. 13,400 923
Bard (C.R.), Inc. 7,600 236
Barnes & Noble, Inc.* 5,100 200
Barnett Banks, Inc. 16,088 919
Battle Mountain Gold Co. 17,700 175
Bausch & Lomb Incorporated 8,600 342
Baxter International Inc. 45,200 1,763
Bay Networks, Inc.* 19,882 943
BayBanks, Inc. 2,800 224
Bear Stearns Companies Inc. 17,548 362
Beckman Instruments, Inc. 4,300 123
Becton, Dickinson & Co. 11,900 671
Bed Bath & Beyond, Inc.* 4,900 134
Bell Atlantic Corp. 70,926 4,238
BellSouth Corp. 80,800 5,555
Belo (A.H.) Corp. Class A 6,000 211
Bemis Co., Inc. 7,400 215
Beneficial Corp. 7,900 388
Bergen Brunswig Corp.
Class A 6,483 135
Berkley (W.R.) Corp. 100 4
Berkshire Hathaway Inc.* 210 5,355
Best Buy Co., Inc.* 5,800 158
Bethlehem Steel Corp.* 16,600 243
Betz Laboratories, Inc. 4,100 172
Beverly Enterprises, Inc.* 18,400 244
Biogen, Inc.* 4,700 258
Biomet, Inc.* 16,900 274
Black & Decker Corp. 12,500 405
Block (H&R), Inc. 18,700 729
Block Drug Co., Inc. Class A 1,901 74
Boatmen's Bancshares, Inc. 19,200 712
Bob Evans Farms, Inc. 6,400 115
Boeing Co. 56,200 3,583
Boise Cascade Corp. 6,500 279
Boston Chicken, Inc.* 6,300 152
Boston Edison Co. 6,900 177
Boston Scientific Corp.* 24,271 965
Bowater Inc. 5,300 253
Boyd Gaming Corp.* 8,700 126
Briggs & Stratton Corp. 4,300 163
Brinker International, Inc.* 10,725 180
Bristol-Myers Squibb Co. 82,700 5,675
Broderbund Software, Inc.* 3,900 287
Brooklyn Union Gas Co. 7,350 185
Brown-Forman Corp. Class B 10,500 389
Browning-Ferris Industries,
Inc. 33,900 1,140
Brunswick Corp. 13,400 270
Burlington Northern Inc. 14,700 1,018
Burlington Resources Inc. 22,000 894
CBI Industries, Inc. 5,700 140
CBS Inc. 10,500 837
CIGNA Corp. 12,400 1,200
CIPSCO Inc. 5,000 164
CMS Energy Corp. 12,500 308
CNA Financial Corp.* 10,500 1,007
CPC International Inc. 23,100 1,452
CSX Corp. 17,000 1,403
CUC International Inc.* 30,525 1,042
Cabletron Systems, Inc.* 12,050 637
Cablevision Systems Corp.
Class A* 3,500 229
Cabot Corp. 5,400 260
Cadence Design Systems, Inc.* 5,500 199
California Energy Co., Inc.* 14,600 305
Callaway Golf Co. 10,000 155
Campbell Soup Co. 41,600 1,903
Canandaigua Wine Co., Inc.
Class A* 6,600 312
Capital Cities/ABC, Inc. 24,900 2,864
Capital One Financial Corp. 10,000 260
Cardinal Health, Inc. 6,362 340
Caremark International, Inc. 10,475 217
Carolina Power & Light Co. 28,500 873
Cascade Communication* 4,100 187
Case Corp. 12,000 453
Caterpillar Inc. 33,300 2,235
Centerior Energy Corp. 21,100 227
Centex Corp. 10,200 298
Centocor, Inc.* 10,600 129
Central & South West
Services Corp. 34,800 853
Central Fidelity Banks, Inc. 5,850 190
Century Communications Corp.
Class A* 13,137 131
Century Telephone
Enterprises, Inc. 8,850 247
Ceridian Corp. 7,700 337
Cerner Corp.* 4,400 150
Champion International Corp. 16,000 906
Chase Manhattan Corp. 30,000 1,725
Chemical Banking Corp. 38,530 2,244
Chevron Corp. 107,900 5,220
Chiron Corp.* 7,403 664
Chris-Craft Industries, Inc.* 4,423 199
Chrysler Corp. 60,800 3,276
Chubb Corp. 14,300 1,305
Cincinnati Bell Inc. 9,400 256
Cincinnati Financial Corp. 9,560 498
Cincinnati Milacron Inc. 5,100 169
Cinergy Corp. 23,265 596
Cintas Corp. 6,600 249
Circuit City Stores, Inc. 14,200 490
Circus Circus Enterprises,
Inc.* 15,400 504
Cirrus Logic, Inc.* 9,200 502
Cisco Systems, Inc.* 44,700 2,931
Citicorp 66,100 4,387
Citizens Utilities Co. Class
A* 31,800 350
Citizens Utilities Co. Class
B 7,737 85
Clayton Homes, Inc. 10,862 257
Clear Channel
Communications, Inc.* 2,300 172
Clorox Co. 8,000 541
Coastal Corp. 15,400 504
Coca-Cola Co. 206,800 13,287
Coca-Cola Enterprises Inc. 21,200 490
Cognex Corp.* 2,900 144
Coleman Co., Inc.* 3,600 136
Colgate-Palmolive Co. 24,100 1,639
Coltec Industries Inc.* 10,300 155
Columbia Gas System, Inc.* 7,600 268
Columbia/HCA Healthcare Corp. 71,272 3,350
Comcast Corp. Class A 6,000 128
Comcast Corp. Special
Class A 41,900 898
</TABLE>
See accompanying Notes to Financial Statements.
50
<PAGE> 51
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Comdisco, Inc. 4,815 $ 147
Comerica Inc. 19,264 686
Commerce Bancshares, Inc. 6,720 240
Compaq Computer Corp.* 41,600 1,986
Compass Bancshares, Inc. 4,850 146
Computer Associates
International, Inc. 25,700 1,786
Computer Sciences Corp.* 8,300 500
Compuware Corp.* 7,000 159
Comsat Corp. Series 1 7,000 163
ConAgra, Inc. 41,224 1,561
Conrail, Inc. 13,800 928
Conseco, Inc. 4,000 201
Consolidated Edison Co. of
New York, Inc. 39,700 1,122
Consolidated Freightways,
Inc. 7,900 204
Consolidated Natural Gas Co. 17,600 680
Consolidated Papers, Inc. 6,600 399
Consolidated Stores Corp.* 6,400 141
Cooper Industries, Inc. 20,700 787
Cooper Tire & Rubber Co. 12,500 325
Cordis Corp.* 3,100 240
Corestates Financial Corp. 25,000 925
Corning Inc. 36,800 1,201
Corporate Express, Inc.* 6,400 150
Countrywide Credit
Industries, Inc. 20,885 459
Cox Communications, Inc.
Class A* 41,306 816
Cracker Barrel Old Country
Store, Inc. 8,700 178
Crane Co. 4,600 166
Credit Acceptance Corp.* 7,000 151
Crestar Financial Corp. 5,400 304
Crown Cork & Seal Co., Inc.* 15,200 684
Crown Vantage Inc.* 1,360 33
Cummins Engine Co., Inc. 5,900 232
Cypress Semiconductor Corp.* 7,800 356
Cyprus Amax Minerals Co. 13,300 372
Cytec Industries Inc.* 1,585 96
DPL Inc. 15,850 353
DQE, Inc. 11,550 276
DSC Communications Corp.* 20,100 1,054
Dana Corp. 16,300 487
Danaher Corp. 8,300 274
Darden Restaurants, Inc.* 23,600 242
Dayton Hudson Corp. 12,700 929
Dean Foods Co. 6,150 163
Dean Witter, Discover & Co. 27,995 1,428
Deere & Co. 15,000 1,283
Dell Computer Corp.* 8,500 654
Delmarva Power & Light Co. 8,700 189
Delta Air Lines, Inc. 9,400 699
Deluxe Corp. 12,200 381
Dentsply International Inc. 4,100 152
Department 56 Inc.* 4,400 195
Deposit Guaranty Corp. 3,000 117
Destec Energy, Inc.* 23,900 379
Detroit Edison Co. 26,600 815
Dial Corp. 14,100 338
Diebold, Inc. 5,275 246
Digital Equipment Corp.* 25,500 1,065
Dillard Department Stores,
Inc. Class A 22,200 685
Dime Bancorp Inc. (New)* 24,926 302
Disney (Walt) Co. 85,300 4,787
Dole Food Company, Inc. 8,600 282
Dollar General Corp. 9,888 260
Dominion Resources, Inc. 28,650 1,035
Donnelley (R.R.) & Sons Co. 24,800 942
Dover Corp. 8,600 686
Dow Chemical Co. 45,400 3,360
Dow Jones & Co., Inc. 14,500 531
Dresser Industries, Inc. 32,060 769
Du Pont (E.I.) de Nemours
& Co. 101,700 6,649
Duke Power Co. 34,200 1,389
Dun & Bradstreet Corp. 28,100 1,626
Duracell International, Inc. 20,500 915
EG&G, Inc. 7,200 137
EMC Corp.* 37,400 767
ENSERCH Corp. 9,500 156
Eastman Chemical Co. 14,725 952
Eastman Kodak Co. 56,100 3,233
Eaton Corp. 14,400 779
Echlin Inc. 8,800 304
Eckerd (Jack) Corp.* 4,500 165
Ecolab Inc. 9,400 257
Edwards (A.G.) & Sons, Inc. 8,562 209
El Paso Natural Gas Co. 4,941 139
Electronic Arts Inc.* 7,400 281
Emerson Electric Co. 38,700 2,762
Engelhard Corp. 24,687 697
Enron Corp. 40,100 1,348
Enron Oil & Gas Co. 26,400 614
Ensco International Inc.* 8,400 151
Entergy Corp. 35,721 857
Equifax Inc. 11,500 447
Equitable Companies, Inc. 30,100 775
Equitable Resources, Inc. 5,100 142
Equitable of Iowa Companies 4,700 175
Ethyl Corp. 17,300 188
Exide Corp. 2,700 141
Exxon Corp. 203,300 13,977
FHP International Corp.* 5,500 136
FINA, Inc. Class A 4,000 185
FMC Corp.* 5,500 424
FORE Systems, Inc.* 3,700 126
FPL Group, Inc. 30,200 1,174
Family Dollar Stores, Inc. 8,700 159
Fastenal Co. 5,200 172
Federal Express Corp.* 10,300 739
Federal Home Loan
Mortgage Corp. 28,800 1,850
Federal National Mortgage
Association 44,100 4,206
Federal Paper Board
Co., Inc. 6,400 254
Federal Signal Corp. 5,866 127
Federated Department
Stores, Inc.* 29,700 802
Fifth Third Bancorp 12,150 680
Finova Group, Inc. 4,000 163
First American Corp. 4,000 171
First Bank System, Inc. 23,800 1,086
First Brands Corp. 3,200 140
First Chicago Corp. 15,600 989
First Colony Corp. 7,550 185
</TABLE>
See accompanying Notes to Financial Statements.
51
<PAGE> 52
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
First Commerce Corp. 4,562 $ 147
First Data Corp. 21,100 1,232
First Empire State Corp. 900 165
First Fidelity Bancorp 14,100 922
First Financial
Management Corp. 9,950 897
First Hawaiian, Inc. 5,000 141
First Interstate Bancorp 13,100 1,251
First Security Corp. 7,175 225
First Tennessee National
Corp. 5,050 267
First USA, Inc. 8,200 377
First Union Corp. 29,288 1,468
First Virginia Banks, Inc. 4,750 195
First of America Bank
Corporation 9,200 407
Firstar Corp. 11,000 408
Firstmerit Corp. 5,400 142
Fiserv, Inc.* 5,675 163
Fleet Financial Group, Inc. 25,400 940
Fleetwood Enterprises, Inc. 6,700 131
Fleming Companies, Inc. 5,800 169
FlightSafety International,
Inc. 4,800 213
Florida Progress Corp. 14,400 437
Flowers Industries, Inc. 6,100 126
Fluor Corp. 14,000 819
Food Lion, Inc. Class A 75,450 431
Food Lion, Inc. Class B 34,800 199
Ford Motor Co. 168,500 5,160
Forest Laboratories, Inc. 6,800 304
Foster Wheeler Corp. 4,800 177
Foundation Health Corp.* 8,200 284
Fourth Financial Corp. 3,800 136
Franklin Resources, Inc. 13,700 754
Freeport-McMoRan Copper &
Gold Inc. Class A 29,531 690
Freeport-McMoRan Copper &
Gold Inc. Class B* 17,894 418
Freeport-McMoRan Inc.* 25,500 143
Fritz Cos., Inc.* 2,500 179
Frontier Corp. 32,200 898
Fruit of the Loom, Inc. Class
A* 11,300 266
GATX Corp. 2,600 134
GEICO Corp. 11,100 758
GTE Corp. 158,000 5,787
GTECH Holdings Corp.* 5,700 165
Gannett Co., Inc. 22,300 1,193
Gap, Inc. 25,000 803
Gartner Group Inc. Class A* 5,600 160
Gateway 2000 Inc.* 11,100 297
Gaylord Entertainment Co.
Class A 14,390 399
Genentech, Inc.* 19,700 928
General Dynamics Corp. 11,400 600
General Electric Co. 276,200 16,261
General Instrument Corp.* 21,000 767
General Mills, Inc. 26,600 1,373
General Motors Corp. 123,900 5,823
General Motors Corp. Class E 70,600 3,292
General Motors Corp. Class H 13,000 518
General Nutrition
Companies, Inc.* 5,700 238
General Public Utilities
Corp. 17,100 489
General Re Corp. 13,800 2,051
General Signal Corp. 6,600 234
Genuine Parts Co. 19,950 786
Genzyme Corp. General
Division* 6,000 335
Genzyme Corp. Tissue Repair* 378 5
Geon Co. 3,800 101
Georgia Gulf Corp. 5,600 186
Georgia-Pacific Corp. 15,300 1,377
Giant Food Inc. Class A 8,700 271
Gillette Co. 74,000 3,090
Glatfelter (P.H.) Co. 5,700 128
Glenayre Technologies, Inc.* 6,400 418
Global Marine, Inc. 51,500 348
Golden West Financial Corp. 8,800 420
Goodyear Tire & Rubber Co. 25,700 1,028
Grace (W.R.) & Co. 16,900 1,126
Grainger (W.W.), Inc. 7,500 446
Grand Casinos, Inc.* 3,400 125
Great Atlantic & Pacific
Tea Co., Inc. 5,700 162
Great Lakes Chemical Corp. 10,000 661
Great Western Financial Corp. 24,300 568
Green Tree Financial
Corporation 12,000 699
Greenpoint Financial Corp. 7,000 194
Guidant* 14,000 354
HBO & Co. 6,300 345
HFS, Inc.* 8,200 384
Halliburton Co. 19,600 831
Hanna (M.A.) Co. 7,150 200
Hannaford Bros. Co. Inc. 5,800 149
Harcourt General, Inc. 11,200 466
Harley-Davidson, Inc. 15,700 436
Harnischfeger Industries
Corp. 6,300 232
Harrahs Entertainment Inc.* 15,400 491
Harris Corp. 5,500 317
Harsco Corp. 3,700 207
Hartford Steam Boiler
Inspection & Ins. Co. 2,700 125
Hasbro, Inc. 13,150 426
Hawaiian Electric Industries,
Inc. 3,900 141
Health Care and
Retirement Corp.* 6,700 211
Health Management Associates,
Inc. Class A* 6,075 204
Health Systems
International, Inc.* 7,300 216
HealthCare Compare Corp.* 6,000 225
Healthsource, Inc.* 4,500 180
Healthsouth Corp.* 11,000 260
Heilig-Meyers Co. 7,350 162
Heinz (H.J.) Co. 39,900 1,691
Hercules Inc. 20,400 1,135
Hershey Foods Corp. 13,200 790
Hewlett-Packard Co. 83,500 6,680
Hibernia Corporation
Class A 17,400 174
Hillenbrand Industries, Inc. 10,000 296
Hillhaven Corp.* 5,000 139
Hilton Hotels Corp. 9,000 599
Home Depot, Inc. 78,366 3,125
Home Shopping Network, Inc.* 11,600 122
Homestake Mining Co. 19,800 327
</TABLE>
See accompanying Notes to Financial Statements.
52
<PAGE> 53
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Hon Industries Inc. 4,200 $ 125
Honeywell Inc. 22,900 1,002
Horizon/CMS Healthcare Corp.* 3,800 83
Hormel Foods Corp. 11,600 278
Host Marriott Corp.* 22,500 259
Houghton Mifflin Co. 5,200 254
Household International, Inc. 17,100 960
Houston Industries Inc. 20,900 886
Hubbell Inc. Class A 600 33
Hubbell Inc. Class B 4,969 291
Humana Inc.* 23,900 436
Huntington Bancshares Inc. 20,402 448
IBP, Inc. 6,700 330
IDEXX Laboratories, Inc.* 4,800 162
IMC Fertilizer, Inc. 4,200 266
IPALCO Enterprises, Inc. 5,500 190
ITT Corp. 17,400 2,081
IVAX Corp. 17,200 441
Idaho Power Co. 5,400 142
Illinois Central Corp. Class
A 5,850 224
Illinois Tool Works Inc. 19,400 1,188
Illinova Corp. 10,800 271
Infinity Broadcasting Corp.
Class A* 7,225 259
Informix Corp.* 23,600 656
Ingersoll-Rand Co. 17,200 651
Inland Steel Industries, Inc. 8,600 235
Integra Financial Corp. 4,900 275
Integrated Device
Technology, Inc.* 5,700 328
Intel Corp. 135,400 8,319
International Business
Machines Corp. 94,600 9,779
International Flavors &
Fragrances Inc. 18,500 886
International Game Technology 18,600 265
International Paper Co. 21,300 1,744
International Rectifier
Corp.* 3,800 154
International Speciality
Products Inc. 15,400 137
Interpublic Group of
Companies, Inc. 15,100 587
Intuit Inc.* 7,800 338
James River Corp. of Virginia 13,600 473
Jefferson Smurfit Corp.* 16,900 256
Jefferson-Pilot Corp. 7,100 446
John Nuveen Co. 5,200 123
Johnson & Johnson 105,200 7,259
Johnson Controls, Inc. 5,800 353
Jones Apparel Group, Inc.* 3,300 115
Jostens, Inc. 9,900 238
KLA Instruments Corp.* 3,500 298
KU Energy Corp. 5,500 150
Kaiser Aluminum Corp.* 8,800 153
Kansas City Power & Light Co. 8,900 199
Kansas City Southern
Industries, Inc. 6,700 295
Kellogg Co. 35,200 2,376
Kelly Services, Inc. Class A 5,525 157
Kemet Corp.* 2,900 165
Kennametal Inc. 4,000 152
Kerr-McGee Corp. 7,800 429
KeyCorp, Inc. 41,423 1,284
Kimberly-Clark Corp. 26,000 1,661
King World Productions, Inc.* 5,500 209
Kmart Corp. 80,700 1,100
Knight-Ridder, Inc. 7,700 433
Kohl's Corp.* 5,100 240
Komag, Inc.* 3,500 218
Kroger Co.* 17,200 561
LCI International Inc.* 4,500 179
LG&E Energy Corp. 4,950 192
LIN Broadcasting Corp.* 10,200 1,309
LSI Logic Corp.* 21,100 1,039
LTV Corp.* 19,200 300
La Quinta Inns, Inc. 7,200 216
Laboratory Corp. of America
Holdings, Inc.* 18,648 259
Lafarge Corp. 8,600 182
Lam Research Corp.* 3,700 222
Lancaster Colony Corp. 4,000 138
Lear Seating Corp.* 7,000 200
Lee Enterprises, Inc. 3,500 139
Leggett & Platt, Inc. 5,900 285
Lehman Brothers Holdings Inc. 15,880 377
Leucadia National Corp. 3,800 202
Lilly (Eli) and Co. 47,300 3,873
Limited, Inc. 58,100 1,075
Lin Television Corp.* 10,550 382
Lincoln National Corp. 17,100 735
Linear Technology Corp. 5,600 452
Litton Industries, Inc.* 6,500 252
Liz Claiborne, Inc. 11,500 262
Lockheed Martin Corp. 33,392 2,033
Loctite Corp. 5,300 254
Loews Corp. 10,300 1,353
Lone Star Steakhouse &
Saloon, Inc.* 7,400 296
Long Island Lighting Co. 17,300 294
Longs Drug Stores Corp. 7,700 285
Longview Fibre Co. 8,000 129
Loral Corp. 15,100 827
Louisiana Land &
Exploration Co. 4,700 180
Louisiana-Pacific Corp. 16,500 392
Lowe's Companies, Inc. 26,100 868
Lubrizol Corp. 9,600 298
Lyondell Petrochemical Co. 12,100 333
MAPCO Petroleum Inc. 4,400 235
MBIA Corp. 6,300 428
MBNA Corp. 24,200 859
MCI Communications Corp. 112,200 2,700
MCN Corp. 9,600 179
MFS Communications
Company, Inc.* 9,700 429
MGIC Investment Corp. 8,700 487
MGM Grand, Inc.* 7,100 178
Mallinckrodt Group Inc. 11,300 425
Manor Care, Inc. 9,550 309
Manpower Inc. 10,700 308
Manville Corp.* 18,000 266
Mark IV Industries, Inc. 7,974 177
Marriott International, Inc. 21,300 756
Marsh & McLennan
Companies, Inc. 12,600 1,038
Marshall & Ilsley Corp. 13,328 335
</TABLE>
See accompanying Notes to Financial Statements.
53
<PAGE> 54
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Martin Marietta Materials,
Inc. 6,400 $ 122
Marvel Entertainment
Group, Inc.* 14,500 208
Masco Corp. 27,400 767
Mattel, Inc. 38,076 1,104
Maxim Integrated
Products, Inc.* 4,800 367
May Department Stores Co. 39,700 1,682
Maytag Corp. 15,300 237
McClatchy Newspapers, Inc.
Class A 2,800 63
McCormick & Co., Inc. 11,400 252
McDonald's Corp. 113,500 4,143
McDonnell Douglas Corp. 19,200 1,541
McGraw-Hill, Inc. 9,000 709
McKesson Corp. New 6,700 291
Mead Corp. 8,500 522
Medaphis Corp.* 8,200 188
Media General, Inc. Class A 3,300 119
Medtronic, Inc. 18,700 1,765
Mellon Bank Corp. 25,772 1,221
Melville Corp. 15,800 527
Mentor Graphics Corp.* 8,000 154
Mercantile Bancorp Inc. 7,950 360
Mercantile Bankshares Corp. 6,750 178
Mercantile Stores Co., Inc. 5,300 243
Merck & Co., Inc. 202,054 10,077
Mercury Finance Co. 17,109 391
Mercury General Corp. 4,200 158
Meridian Bancorp, Inc. 8,300 331
Merrill Lynch & Co., Inc. 28,400 1,636
Merry-Go-Round
Enterprises, Inc.* 200 1
Michigan National Corp. 2,000 215
Micro Warehouse, Inc.* 6,300 300
Microchip Technology, Inc.* 4,500 171
Micron Technology, Inc. 33,200 2,552
Microsoft Corp.* 95,200 8,800
Mid Atlantic Medical
Services Inc.* 7,800 145
Midamerican Energy Company 15,200 217
Midlantic Corp. 7,600 392
Millipore Corp. 7,400 258
Minerals Technologies, Inc. 3,400 123
Minnesota Mining &
Manufacturing Co. 68,500 3,742
Minnesota Power & Light Co. 4,800 129
Mirage Resorts, Inc.* 13,350 459
Mitchell Energy & Development
Corp. Class A 8,000 144
Mitchell Energy & Development
Corp. Class B 3,900 68
Mobil Corp. 64,900 6,182
Mobile Telecommunications
Technologies Corp.* 10,900 334
Modine Manufacturing Co. 4,500 134
Molex Inc. 14,356 614
Molex Inc. Class A 5,893 235
Monsanto Co. 18,700 1,774
Montana Power Co. 7,900 174
Morgan (J.P.) & Co. Inc. 31,600 2,303
Morgan Stanley Group Inc. 12,600 1,095
Morrison Restaurants, Inc. 4,875 96
Morton International, Inc. 25,900 842
Motorola, Inc. 95,700 7,154
Multimedia, Inc.* 5,300 226
Murphy Oil Corp. 6,370 258
Mylan Laboratories Inc. 17,550 401
NBD Bancorp, Inc. 28,260 1,010
NGC Corp.* 11,000 105
NICOR Inc. 7,800 200
NIKE, Inc. Class B 12,600 1,167
NIPSCO Industries, Inc. 9,000 295
NYNEX Corp. 69,800 3,141
Nabisco Holdings Corp.* 7,000 200
Nalco Chemical Co. 9,800 343
National City Corp. 24,840 739
National Fuel Gas Co. 5,800 163
National Gypsum Co. (New)* 3,500 187
National Semiconductor Corp.* 21,800 616
National Service Industries,
Inc. 7,200 209
NationsBank Corp. 44,184 2,712
Navistar International Corp.* 11,250 146
Nevada Power Co. 6,000 122
New England Electric Co. 9,800 343
New York State Electric &
Gas Corp. 10,400 251
New York Times Co. Class A 15,313 381
Newell Co. 23,674 592
Newmont Gold Co. 14,500 602
Newmont Mining Corp. 15,132 658
Nextel Communications, Inc.* 36,100 650
Niagara Mohawk Power Corp. 25,200 302
Nine West Group Inc.* 4,700 200
Noble Affiliates, Inc. 7,400 204
NorAm Energy Co. 25,215 180
Nordson Corp. 2,700 153
Nordstrom, Inc. 12,400 510
Norfolk Southern Corp. 22,200 1,571
Northeast Utilities 18,900 432
Northern States Power Co. 11,200 477
Northern Trust Corp. 7,950 356
Northrop Grumman Corp. 7,300 444
Northwest Airlines
Corporation Class A* 16,000 576
Norwest Corp. 53,488 1,611
Novell, Inc.* 61,000 1,102
Novellus Systems, Inc.* 2,200 162
Nucor Corp. 15,100 740
Occidental Petroleum Corp. 54,400 1,183
Office Depot, Inc.* 27,300 850
Officemax Inc.* 11,400 268
Ogden Corp. 10,388 242
Ohio Casualty Corp. 5,300 176
Ohio Edison Co. 27,000 584
Oklahoma Gas & Electric Co. 5,700 202
Old Kent Financial Corp. 6,405 243
Old National Bancorp 3,335 115
Old Republic International
Corp. 8,400 232
Olin Corp. 5,000 323
Olsten Corp. 5,550 201
Omnicom Group Inc. 5,300 333
OrNda Healthcorp* 6,800 137
Oracle Systems Corp.* 70,950 2,842
Oryx Energy Co.* 14,200 192
Outback Steakhouse, Inc.* 6,250 202
</TABLE>
See accompanying Notes to Financial Statements.
54
<PAGE> 55
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Owens-Corning Fiberglas
Corp.* 7,600 $ 298
Owens-Illinois, Inc.* 16,900 230
Oxford Health Plans, Inc.* 4,900 241
PACCAR Inc. 5,660 278
PNC Bank Corp. 39,300 1,032
PPG Industries, Inc. 34,600 1,479
PPL Resources, Inc. 23,220 508
PacifiCare Health Systems,
Inc. Class A* 1,700 93
PacifiCare Health Systems,
Inc. Class B* 5,600 319
PacifiCorp 46,500 843
Pacific Enterprises 11,800 283
Pacific Gas & Electric Co. 71,500 2,056
Pacific Telecom, Inc. 5,800 173
Pacific Telesis Group 71,100 2,017
Paging Network, Inc.* 7,400 290
Paine Webber Group Inc. 17,625 339
Pall Corp. 17,033 373
Panhandle Eastern Corp. 25,300 633
Parametric Technology Corp.* 10,300 570
Parker Hannifin Corp. 10,950 434
Paul Revere Corp. 6,900 121
Paychex, Inc. 6,450 263
Peco Energy Co. 34,500 919
Penney (J.C.) Co., Inc. 40,200 1,819
Pennzoil Co. 7,000 308
Pentair, Inc. 3,100 140
PeopleSoft, Inc.* 3,700 256
Peoples Energy Corp. 4,500 123
Pep Boys - Manny, Moe & Jack 8,700 239
PepsiCo, Inc. 129,000 5,837
Perkin-Elmer Corp. 5,800 198
Perrigo Co.* 12,100 162
Petsmart Inc.* 7,400 224
Pfizer Inc. 103,500 5,110
Phelps Dodge Corp. 12,400 786
Philip Morris Companies Inc. 139,100 10,380
Phillips Petroleum Co. 41,600 1,368
Phycor, Inc.* 3,400 143
Picturetel Corp.* 2,400 135
Pinnacle West Capital Corp. 13,300 331
Pioneer Hi-Bred
International, Inc. 12,700 545
Pitney Bowes Inc. 25,800 1,048
Pittston Service Group 5,500 140
Polaroid Corp. 6,600 288
Policy Management
Systems Corp.* 3,000 149
Portland General Corp. 7,200 173
Potlatch Corp. 4,300 170
Potomac Electric Power Co. 17,500 374
Praxair, Inc. 20,900 543
Premark International, Inc. 9,300 487
Premier Industrial Corp. 12,850 308
Price (T. Rowe)
Associates, Inc. 4,100 194
Price/Costco, Inc.* 31,304 532
Procter & Gamble Co. 112,400 7,798
Progressive Corp. 12,300 546
Promus Hotel Corp.* 7,700 159
Protective Life Corp. 3,800 108
Provident Life & Accident
Ins. Co. of America Class B 5,600 146
Providian Corp. 15,400 591
Public Service Co. of
Colorado 9,300 301
Public Service Enterprise
Group Inc. 40,500 1,114
Puget Sound Power &
Light Co. 9,200 199
Pyxis Corp.* 5,400 122
QUALCOMM Inc.* 9,600 469
Quaker Oats Co. 23,100 803
Quantum Corp.* 8,100 194
Questar Corp. 6,100 186
Quorum Health Group, Inc.* 7,100 151
RJR Nabisco Holdings Corp. 55,036 1,569
RPM, Inc. 8,700 173
Ralcorp Holdings, Inc.* 4,566 103
Ralston Purina Group 17,300 900
Raychem Corp. 6,700 294
Rayonier, Inc. 3,875 149
Raytheon Co. 20,500 1,658
Read-Rite Corp.* 7,000 286
Reader's Digest Association,
Inc. Class A 18,300 846
Reader's Digest Association,
Inc. Class B 3,200 134
Reebok International Ltd. 11,700 415
Regions Financial Corp. 6,650 268
Reliastar Financial Corp. 5,800 220
Republic New York Corp. 7,800 439
Revco D.S., Inc.* 10,000 198
Reynolds & Reynolds Co. Class
A 5,600 180
Reynolds Metals Co. 11,300 675
Rhone-Poulenc Rorer Inc. 23,600 1,044
Rite Aid Corp. 11,900 333
Riverwood International Corp. 9,300 242
Roadway Services, Inc. 6,000 329
Rochester Gas & Electric
Corp. 5,900 131
Rockwell International Corp. 34,900 1,562
Rohm & Haas Co. 11,900 711
Rollins, Inc. 5,600 134
Rouse Co. 6,700 140
Rubbermaid Inc. 29,000 863
Russell Corp. 5,900 162
Ryder System, Inc. 11,800 286
S3 Inc.* 3,300 129
SAFECO Corp. 11,300 732
SBC Communications, Inc. 98,428 4,983
SCANA Corp. 13,800 321
SCE Corp 74,600 1,240
SPS Transaction Services,
Inc.* 4,000 108
SUPERVALU Inc. 10,200 302
SYSCO Corp. 30,700 883
Safety-Kleen Corp. 8,600 116
Safeway Inc.* 18,400 725
Salomon Inc 15,900 610
San Diego Gas & Electric Co. 17,300 376
Santa Fe Energy
Resources, Inc.* 13,600 129
Santa Fe Pacific Corp. 27,832 790
Santa Fe Pacific Gold Corp. 25,720 312
Sara Lee Corp. 78,600 2,181
Scherer (R.P.) Corp.* 3,600 155
Schering-Plough Corp. 61,500 2,867
Scholastic Corp.* 2,800 173
</TABLE>
See accompanying Notes to Financial Statements.
55
<PAGE> 56
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Schulman (A.), Inc. 5,462 $ 146
Scientific-Atlanta, Inc. 11,700 234
Scott Paper Co. 25,000 1,159
Scripps (E.W.) Co. Class A 14,875 500
Seagate Technology, Inc.* 10,400 460
Sealed Air Corp.* 4,800 253
Sears, Roebuck & Co. 62,800 2,033
Sensormatic Electronics Corp. 11,150 234
Service Corp. International 16,900 592
Shared Medical Systems Corp. 3,400 126
Shaw Industries, Inc. 20,100 302
Shawmut National Corp. 19,300 625
Sherwin-Williams Co. 13,900 499
Sigma-Aldrich Corp. 7,100 339
Signet Banking Corp. 8,300 217
Silicon Graphics, Inc.* 27,900 1,179
Silicon Valley Group, Inc.* 4,000 172
Smith (A.O.) Corp. Class B 900 22
Snap-on Tools Inc. 6,100 250
Solectron Corp.* 5,600 199
Sonat Inc. 13,000 413
Sonat Offshore Drilling, Inc. 4,300 147
Sonoco Products Co. 14,810 398
Sotheby's Holdings, Inc.
Class A 19,800 275
SouthTrust Corp. 11,425 294
Southern Co. 108,700 2,296
Southern National Corp. 15,450 413
Southern New England
Telecommunications 9,800 330
Southern Pacific Rail Corp.* 23,700 581
Southland Corporation* 55,000 205
Southwest Airlines Co. 23,300 603
Southwestern Public Service
Co. 6,000 180
Spelling Entertainment
Group, Inc. 13,200 173
Spiegel, Inc. Class A 15,700 185
Sprint Corp. 58,434 2,074
St. Joe Paper Co. 4,300 263
St. Jude Medical, Inc.* 6,800 405
St. Paul Companies, Inc. 15,000 814
Standard Federal Bankcorp 4,700 183
Stanley Works 6,400 283
Staples, Inc.* 20,737 530
Star Banc Corp. 4,100 217
Starbucks Corp.* 6,000 240
State Street Boston Corp. 12,200 450
Sterling Software, Inc.* 3,700 165
Stewart & Stevenson
Services, Inc. 5,000 160
Stewart Enterprises, Inc.
Class A* 3,700 118
Stone Container Corp.* 16,000 348
Stop & Shop Companies, Inc.* 7,400 179
Storage Technology Corp.* 7,800 214
Stratacom Inc.* 6,800 332
Stryker Corp. 7,300 306
Student Loan Marketing
Association 12,000 650
Sun Co., Inc. 15,900 423
Sun Microsystems, Inc.* 16,900 976
SunGard Data Systems Inc.* 4,800 131
Sunamerica, Inc. 6,100 364
Sunbeam-Oster Co., Inc. 14,100 229
Sundstrand Corp. 4,500 307
Sunglass Hut International,
Inc.* 3,400 144
Suntrust Banks, Inc. 19,600 1,203
Superior Industries
International, Inc. 4,200 124
Sybase, Inc.* 11,120 358
Sybron International Corp.* 4,900 201
Symantec Corp.* 5,600 162
Symbol Technologies, Inc.* 4,300 149
Synopsys, Inc.* 2,400 138
Synovus Financial Corp. 11,100 283
TCF Financial Corp. 6,400 356
TIG Holdings, Inc. 9,300 238
TJX Companies, Inc. 11,100 139
TRINOVA Corp. 4,500 165
TRW Inc. 11,400 888
Talbots, Inc. 7,500 259
Tambrands Inc. 5,400 242
Tandem Computers Inc.* 17,800 218
Tandy Corp. 12,058 749
Teco Energy Co. 16,700 361
Tecumseh Products Co.
Class A 3,500 169
Tecumseh Products Co.
Class B 800 37
Tektronix, Inc. 4,600 210
Tele-Communications Inc.
Liberty Media Group
Class A* 26,086 693
Tele-Communications, Inc.
TCI International, Inc.
Class A* 104,346 1,924
Teledyne, Inc. 8,282 197
Telephone & Data Systems,
Inc. 8,600 353
Tellabs, Inc.* 15,800 741
Temple-Inland Inc. 8,400 435
Tencor Instruments* 5,000 216
Tenet Healthcare Corp.* 30,368 482
Tenneco Inc. 28,500 1,382
Teradyne, Inc.* 13,200 500
Terra Industries, Inc. 11,100 148
Texaco Inc. 41,700 2,700
Texas Instruments Inc. 30,600 2,291
Texas Utilities Co. 35,600 1,237
Textron Inc. 13,200 904
Thermo Cardiosystems Inc.* 5,000 197
Thermo Electron Corp.* 12,325 532
Thermo Instrument
Systems Inc.* 10,050 258
Thermolase* 5,700 113
Thomas & Betts Corp. 2,700 182
Tidewater Inc. 7,800 193
Time Warner Inc. 63,680 2,683
Times Mirror Co. Series A 17,400 533
Timken Co. 4,600 208
Tootsie Roll Industries, Inc. 7,864 314
Torchmark Corp. 10,550 422
Tosco Corp. 5,300 170
Total System Services, Inc. 9,900 193
Toys 'R' Us, Inc.* 45,550 1,184
TransTexas Gas Corporation* 11,300 202
Transamerica Corp. 10,500 714
</TABLE>
See accompanying Notes to Financial Statements.
56
<PAGE> 57
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Transatlantic Holdings, Inc. 3,300 $ 231
Travelers Inc. 53,217 2,554
TriMas Corp. 7,800 167
Tribune Co. 11,900 797
Trinity Industries, Inc. 5,950 193
Triton Energy Corp. 5,200 276
Turner Broadcasting System,
Inc. Class A 10,200 315
Turner Broadcasting System,
Inc. Class B 35,800 1,101
Tyco International Ltd. 11,807 698
Tyson Foods, Inc. Class A 22,200 567
U S WEST, Inc. 77,510 3,372
U.S. Bancorp 14,250 409
U.S. Healthcare, Inc. 25,225 804
U.S. Robotics, Inc. 3,000 420
UAL Corp.* 4,100 646
UJB Financial Corp. 8,400 291
UNUM Corp. 12,308 591
USF&G Corp. 15,300 277
USG Corp.* 6,200 168
USLIFE Corp. 3,600 155
UST Inc. 33,900 924
USX-Marathon Group 50,300 1,037
USX-US Steel Group 14,160 464
Ultramar Corp. 5,800 137
Unicom Corp. 35,400 996
Unifi, Inc. 9,925 251
Union Bank 7,400 376
Union Camp Corp. 12,300 700
Union Carbide Corp. 22,000 781
Union Electric Co. 15,300 545
Union Pacific Corp. 34,700 2,273
Union Planters Corp. 6,100 181
Union Texas Petroleum
Holdings, Inc. 13,100 255
Unisys Corp.* 25,900 207
United Asset
Management Corp. 3,900 152
United HealthCare Corp. 28,400 1,200
United States Cellular Corp.* 14,800 518
United States Surgical Corp. 8,300 211
United Technologies Corp. 20,400 1,701
Unitrin, Inc. 7,200 341
Universal Foods Corp. 4,100 130
Unocal Corp. 41,034 1,195
Upjohn Co. 28,300 1,199
UtiliCorp United Inc. 6,600 179
V.F. Corp. 9,800 537
VLSI Technology, Inc.* 6,100 201
Valero Energy Corp. 6,600 151
Valhi, Inc. 21,000 163
Valley National Bancorp 2,000 47
Valspar Corp. 2,800 112
Value Health, Inc.* 9,082 314
Value Jet* 4,000 117
Vanguard Cellular Systems,
Inc. Class A* 5,750 157
Varian Associates, Inc. 4,800 259
Varity Corp.* 6,300 287
Vastar Resources 14,800 463
Vencor, Inc.* 4,300 127
Viacom Inc. Class A* 13,212 642
Viacom Inc. Class B* 59,174 2,877
Vicor Corp.* 3,200 150
Vigoro Corp. 3,000 132
Viking Office Products, Inc.* 5,600 200
Vishay Intertechnology, Inc.* 8,200 332
Vons Companies, Inc.* 5,700 128
Vulcan Materials Co. 5,300 279
WMX Technologies, Inc. 79,500 2,335
WPL Holdings, Inc. 4,400 125
Wachovia Corp. 29,220 1,161
Wal-Mart Stores, Inc. 377,800 9,303
Walgreen Co. 39,800 975
Wallace Computer Services,
Inc. 3,400 196
Warnaco, Inc. Class A 5,600 122
Warner-Lambert Co. 21,600 1,952
Washington Federal, Inc. 6,095 141
Washington Gas Light Co. 6,200 119
Washington Mutual, Inc. 9,125 237
Washington Post Co.
Class B 1,800 517
Washington Water Power Co. 7,700 119
Weis Markets, Inc. 6,300 178
WellPoint Health Networks
Inc. Class A* 14,900 443
Wellman, Inc. 4,600 117
Wells Fargo & Co. 8,200 1,528
Wendy's International, Inc. 15,500 304
Wesco Financial Corp. 1,000 133
West One Bancorp 5,300 216
Western Atlas, Inc.* 8,600 390
Western Digital Corp.* 8,800 182
Western National Corp. 9,500 119
Western Resources, Inc. 9,231 279
Westinghouse Electric Corp. 57,600 785
Westvaco Corp. 12,200 538
Weyerhaeuser Co. 35,400 1,628
Wheelabrator Technologies
Inc. 27,300 427
Whirlpool Corp. 11,100 605
Whitman Corp. 15,200 306
Willamette Industries, Inc. 8,500 587
Williams Companies, Inc. 18,560 680
Wilmington Trust Co. 4,900 148
Winn-Dixie Stores, Inc. 13,700 815
Wisconsin Central
Transportation Corp.* 2,300 136
Wisconsin Energy Corp. 19,600 527
Witco Corp. 7,900 263
Woolworth Corp. 19,800 265
Worldcom Inc.* 34,917 1,176
Worthington Industries, Inc. 16,700 335
Wrigley (Wm.) Jr. Co. 19,100 862
XTRA Corp. 2,200 97
Xerox Corp. 17,400 2,101
Xilinx, Inc.* 12,900 552
York International Corp. 8,400 374
Zilog, Inc.* 3,800 154
--------
TOTAL COMMON STOCK
(Cost $622,204) 821,297
--------
</TABLE>
See accompanying Notes to Financial Statements.
57
<PAGE> 58
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
PREFERRED STOCK--0.0%
Teledyne, Inc. Preferred
Series E* 154 $ 2
--------
TOTAL PREFERRED STOCK
(Cost $1) 2
--------
<CAPTION>
Maturity
(000s)
---------
<S> <C> <C>
REPURCHASE AGREEMENT--0.6%
PNC Bank, N.A. 5.00%
Dated 8/31/95
Due 09/01/95
Collateralized By:
Federal National
Mortgage Association:
$10,970,000 Par; 6.25%
Due 12/25/19 $4,997 4,996
--------
TOTAL REPURCHASE AGREEMENT
(Cost $4,996) 4,996
--------
TOTAL INVESTMENTS -- 99.9%
(Cost $627,201) 826,295
--------
OTHER ASSETS AND LIABILITIES -- 0.1%
Other Assets 3,819
Liabilities (3,400)
--------
419
--------
NET ASSETS -- 100.0%
Applicable to 52,732,983
outstanding $0.00001
par value shares
(unlimited shares authorized) $826,714
========
NET ASSET VALUE PER SHARE $15.68
======
</TABLE>
- ------------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
58
<PAGE> 59
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF OPERATIONS (in thousands)
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends $ 15,821
Interest 246
--------
Total investment income 16,067
--------
Expenses:
Investment advisory and administration fee 1,777
Transfer agency and shareholder service fees 1,564
Custodian fees 201
Registration fees 65
Professional fees 53
Shareholder reports 158
Trustees' fees 36
Amortization of deferred organization costs 50
Insurance and other expenses 44
--------
3,948
Less expenses reduced (585)
--------
Total expenses incurred by Fund 3,363
--------
Net investment income 12,704
--------
Net realized gain (loss) on investments:
Proceeds from sales of investments 15,237
Cost of investments sold (14,807)
--------
Net realized gain on investments sold 430
--------
Change in net unrealized appreciation (depreciation)
on investments:
Beginning of period 83,149
End of period 199,094
--------
Increase in net unrealized appreciation on investments 115,945
--------
Increase in net assets resulting from operations $129,079
========
</TABLE>
See accompanying Notes to Financial Statements.
59
<PAGE> 60
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended
August 31,
1995 1994
------------ ------------
<S> <C> <C>
Operations:
Net investment income $ 12,704 $ 10,821
Net realized gain (loss) on investments
sold 430 (1,259)
Increase in net unrealized appreciation
on investments 115,945 13,264
---------- ----------
Increase in net assets resulting
from operations 129,079 22,826
---------- ----------
Dividends to shareholders from
net investment income (6,199) (10,613)
---------- ----------
Capital Share Transactions:
Proceeds from shares sold 264,444 152,247
Net asset value of shares issued in
reinvestment of dividends 5,550 9,565
Early withdrawal fees 93 84
Less payments for shares redeemed (120,314) (135,320)
---------- ----------
Increase in net assets from capital
share transactions 149,773 26,576
---------- ----------
Total increase in net assets 272,653 38,789
Net Assets:
Beginning of period 554,061 515,272
---------- ----------
End of period (including undistributed
net investment income of $8,679 and
$2,174, respectively) $ 826,714 $ 554,061
========== ==========
Number of Fund Shares:
Sold 18,751 11,974
Reinvested 439 761
Redeemed (8,825) (10,627)
---------- ----------
Net increase in shares outstanding 10,365 2,108
Shares Outstanding:
Beginning of period 42,368 40,260
---------- ----------
End of period 52,733 42,368
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
60
<PAGE> 61
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUND
The Schwab 1000 Fund (the "Fund") is a series of Schwab Investments (the
"Trust"), an open-end, management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the Fund, the Trust also offers -- the Schwab Short/Intermediate
Government Bond Fund, the Schwab Long-Term Government Bond Fund, the Schwab
California Short/Intermediate Tax-Free Bond Fund, the Schwab California
Long-Term Tax-Free Bond Fund, the Schwab Short/Intermediate Tax-Free Bond Fund
and the Schwab Long-Term Tax-Free Bond Fund. The assets of each series are
segregated and accounted for separately.
The investment objective of the Fund is to provide a total return which matches
that of the Schwab 1000 Index(R), an index created to represent the performance
of the 1000 largest publicly traded common stocks of United States companies.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Investments in securities traded on an exchange are valued
at the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Fund's investment manager pursuant to Board of Trustees
guidelines. Short-term securities with 60 days or less to maturity are stated at
amortized cost, which approximates market value.
Security transactions and investment income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Dividend income and distributions to
shareholders are recorded on the ex-dividend date; interest income is recorded
on the accrual basis. Realized gains and losses from security transactions are
determined on an identified cost basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from the Fund's commencement of operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
61
<PAGE> 62
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. The Fund is considered a separate entity for tax purposes.
At August 31, 1995, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $199,094,000 of which $209,936,000
related to appreciated securities and $10,842,000 related to depreciated
securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of .30% of the first $500 million
of average daily net assets and .22% of such assets over $500 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$1,777,000 during the year ended August 31, 1995, before the Investment Manager
reduced its fee (see Note 5).
Sub-advisory agreement -- Prior to June 1, 1995, the Investment Manager had a
sub-advisory agreement with Dimensional Fund Advisors Inc. ("Dimensional"),
under which Dimensional performed day-to-day portfolio management for the Fund.
Dimensional did not receive compensation directly from the Fund. However, the
Investment Manager did pay Dimensional an annual fee, payable monthly, of .10%
of the first $500 million of average daily net assets and .02% of such assets
over $500 million.
Effective June 1, 1995, the sub-advisory agreement for the Fund was terminated
and the Investment Manager assumed day-to-day portfolio management
responsibility for the Fund.
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets for transfer
agency services and .20% of such assets for shareholder services. For the year
ended August 31, 1995, the Fund incurred transfer agency and shareholder service
fees of $1,564,000, before Schwab reduced its fees (see Note 5).
Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers and/or directors of the Investment Manager and/or
Schwab. During the year ended August 31, 1995, the Trust made no direct payments
to its officers or trustees who were "interested persons" within the meaning of
the Investment Company Act of 1940, as amended. The Fund incurred fees of
$36,000 related to the Trust's unaffiliated trustees.
62
<PAGE> 63
SchwabFunds(R) 15
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
4. BORROWING AGREEMENT
The Trust has an arrangement with PNC Bank, N.A., the Fund's custodian, whereby
the Fund may borrow up to $20,000,000, on a temporary basis, to fund
redemptions. Amounts borrowed under this arrangement bear interest at
periodically negotiated rates and may be collateralized by the assets of the
Fund. During the year ended August 31, 1995, no borrowings were made under this
arrangement.
5. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
During the year ended August 31, 1995, the Investment Manager and Schwab reduced
a portion of their fees in order to limit the Fund's ratio of operating expenses
to average net assets; the total of such fee reductions were $137,000 and
$448,000, respectively.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated (in thousands) $170,774 and $15,237, respectively, during the year
ended August 31, 1995.
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a .50% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended August 31, 1995, total early withdrawal fees
retained by the Fund amounted to $93,000.
8. COMPOSITION OF NET ASSETS
At August 31, 1995, net assets consisted of:
<TABLE>
<S> <C>
Capital paid in $621,929,000
Accumulated undistributed net investment income 8,679,000
Accumulated net realized loss on investments sold (2,988,000)
Net unrealized appreciation on investments 199,094,000
------------
Total $826,714,000
============
</TABLE>
At August 31, 1995, the Fund's Statement of Net Assets included liabilities of
$432,000 for Fund shares redeemed, $135,000 for investment advisory and
administration fee payable, $90,000 for transfer agency and shareholder service
fees payable and $2,582,000 for portfolio securities purchased.
63
<PAGE> 64
SchwabFunds(R) 16
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
For the
period
April 2, 1991
(commencement
For the eight For the of operations)
For the year ended months ended year ended to
August 31, August 31, December 31, December 31,
1995 1994 1993 1992 1991
---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 13.08 $ 12.80 $ 11.96 $ 11.26 $ 10.00
Income from Investment
- ----------------------
Operations
----------
Net investment income .26 .26 .17 .24 .15
Net realized and
unrealized gain (loss)
on investments 2.48 .28 .79 .71 1.26
-------- -------- -------- -------- --------
Total from investment
operations 2.74 .54 .96 .95 1.41
Less Distributions
- ------------------
Dividends from net
investment income (.14) (.26) (.12) (.25) (.15)
Distributions from realized
gain on investments -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions (.14) (.26) (.12) (.25) (.15)
-------- -------- -------- -------- --------
Net asset value at
end of period $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26
======== ======== ======== ======== ========
Total return (%) 21.23 4.28 8.06 8.52 14.25
- ----------------
Ratios/Supplemental Data
- ------------------------
Net assets, end
of period (000s) $826,714 $554,061 $515,272 $370,980 $ 192,206
Ratio of expenses to
average net assets (%) .54 .51 .45* .35 --*
Ratio of net investment
income to average
net assets (%) 2.03 2.06 2.21* 2.45 3.21*
Portfolio turnover
rate (%) 2 3 1 1 1
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
August 31, 1995, 1994, 1993, December 31, 1992 and 1991 would have been .63%,
.56%, .49%*, .52% and 1.05%*, respectively, and the ratio of net investment
income to average net assets would have been 1.94%, 2.01%, 2.17%*, 2.28% and
2.16%*, respectively.
* Annualized
64
<PAGE> 65
SchwabFunds(R) 17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Trustees
and Shareholders of the Schwab 1000 Fund(R)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Schwab 1000 Fund (one of the
series constituting Schwab Investments, hereafter referred to as the "Trust") at
August 31, 1995, and the results of its operations and the changes in its net
assets for the periods presented, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 1995 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
September 29, 1995
1995 SPECIAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
NOTICE TO CORPORATE SHAREHOLDERS
--------------------------------
100% of the Fund's distributions for the fiscal year ended August 31, 1995
qualify for the corporate dividends received deduction.
- --------------------------------------------------------------------------------
65
<PAGE> 66
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
AGENCY OBLIGATIONS--33.7%(a)
Federal Home Loan Bank
7.59%, 02/03/97 $ 9,425 $ 9,649
7.76%, 05/30/97 5,000 5,154
7.28%, 02/24/98 6,340 6,536
Federal Home Loan Mortgage Corp.
8.40%, 11/30/01 2,500 2,621
Federal National Mortgage Association
7.07%, 11/18/96 10,000 10,143
6.57%, 08/10/00 3,000 3,014
6.75%, 08/24/00 5,000 5,052
Student Loan Marketing Association
7.56%, 12/09/96 10,000 10,219
--------
TOTAL AGENCY OBLIGATIONS
(Cost $51,246) 52,388
--------
COLLATERALIZED MORTGAGE OBLIGATIONS
(PLANNED AMORTIZATION
CLASS I)--3.2%(a)(b)
Federal Home Loan Mortgage Corp.
1365 PE
5.75%, 04/25/97 5,000 4,962
--------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(PLANNED AMORTIZATION
CLASS I)
(Cost $4,822) 4,962
--------
U.S. TREASURY OBLIGATIONS--61.2%(a)
U.S. Treasury Notes
6.875%, 10/31/96 5,000 5,064
7.50%, 01/31/97 10,000 10,235
5.625%, 08/31/97 5,000 4,982
5.50%, 09/30/97 5,000 4,970
7.375%, 11/15/97 10,000 10,308
7.875%, 01/15/98 2,700 2,819
7.25%, 02/15/98 5,000 5,153
6.125%, 05/15/98 10,000 10,052
5.875%, 08/15/98 8,000 7,989
5.875%, 03/31/99 10,000 9,960
6.875%, 07/31/99 5,000 5,143
7.125%, 09/30/99 5,000 5,191
7.75%, 12/31/99 5,000 5,317
5.875%, 06/30/00 8,000 7,938
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $94,401) 95,121
--------
<CAPTION>
Shares
-------
<S> <C> <C>
SHORT-TERM INVESTMENTS--1.9%(c)
Provident Institutional Funds--Federal
Funds Portfolio
5.414%, 09/07/95 2,974 2,974
--------
TOTAL SHORT-TERM INVESTMENTS
(Cost $2,974) 2,974
--------
TOTAL INVESTMENTS--100.0%
(Cost $153,443) $155,445
========
</TABLE>
See accompanying Notes to Schedules of Investments.
66
<PAGE> 67
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
AGENCY OBLIGATIONS--50.5%(a)
Federal Farm Credit Bank
8.06%, 01/04/05 $ 815 $ 904
Federal Home Loan Bank
8.35%, 09/07/04 500 501
Federal Home Loan Mortgage Corp.
7.65%, 05/10/05 1,000 1,036
8.57%, 10/26/09 500 532
Federal National Mortgage Association
8.50%, 02/01/05 500 536
7.875%, 02/24/05 1,000 1,092
6.35%, 06/10/05 1,000 988
Tennessee Valley Authority
6.375%, 06/15/05 1,000 993
-------
TOTAL AGENCY OBLIGATIONS
(Cost $6,337) 6,582
-------
U.S. TREASURY
OBLIGATIONS--48.3%(a)
U.S. Treasury Bonds
7.25%, 05/15/16 300 317
7.50%, 11/15/16 1,050 1,139
8.125%, 08/15/19 1,000 1,159
U.S. Treasury Notes
7.50%, 11/15/01 300 320
5.75%, 08/15/03 1,560 1,509
7.25%, 08/15/04 500 532
6.50%, 05/15/05 1,300 1,318
-------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $6,106) 6,294
-------
<CAPTION>
Shares
------
<S> <C> <C>
SHORT-TERM
INVESTMENTS--1.2%(c)
Provident Institutional Funds--Federal
Funds Portfolio
5.414%, 09/07/95 156 156
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $156) 156
-------
TOTAL INVESTMENTS--100.0%
(Cost $12,599) $13,032
=======
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS.
(a) Interest rates represent stated coupon rate of security.
(b) Maturity dates represent average weighted maturities of the underlying
mortgage obligations.
(c) Interest rates represent the yield on August 31, 1995.
See accompanying Notes to Financial Statements.
67
<PAGE> 68
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $153,443 and $12,599,
respectively) $155,445 $13,032
Interest receivable 1,977 172
Receivable for fund shares sold 142 52
Deferred organization costs 18 35
Prepaid expenses 6 5
Dividends receivable 9 1
-------- -------
Total assets 157,597 13,297
-------- -------
LIABILITIES
Payable for:
Dividends 155 14
Fund shares redeemed 144 310
Investment advisory and administration
fee 41 --
Transfer agency and
shareholder service fees 15 --
Other 51 24
-------- -------
Total liabilities 406 348
-------- -------
Net assets applicable to outstanding
shares $157,191 $12,949
======== =======
NET ASSETS CONSIST OF:
Capital paid in $165,863 $12,780
Accumulated undistributed
net investment income 71 4
Accumulated net realized loss on
investments sold (10,745) (268)
Net unrealized appreciation on
investments 2,002 433
-------- -------
$157,191 $12,949
======== =======
THE PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 15,968 1,321
Net asset value, offering and
redemption price per share $9.84 $9.80
</TABLE>
See accompanying Notes to Financial Statements.
68
<PAGE> 69
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Interest income $ 10,987 $ 730
--------- --------
Expenses:
Investment advisory and administration
fee 671 41
Transfer agency and
shareholder service fees 411 25
Custodian fees 89 9
Registration fees 61 18
Professional fees 24 4
Shareholder reports 30 2
Trustees' fees 11 1
Amortization of deferred organization
costs 17 12
Insurance and other expenses 15 5
--------- --------
1,329 117
Less expenses reduced and absorbed (375) (117)
--------- --------
Total expenses incurred by Fund 954 0
--------- --------
Net investment income 10,033 730
--------- --------
Net realized gain (loss) on investments:
Proceeds from sales of investments 392,243 31,436
Cost of investments sold (395,475) (31,414)
--------- --------
Net realized gain (loss) on
investments sold (3,232) 22
--------- --------
Change in net unrealized appreciation
(depreciation) on investments:
Beginning of period (1,189) (193)
End of period 2,002 433
--------- --------
Increase in net unrealized
appreciation on investments 3,191 626
--------- --------
Increase in net assets resulting
from operations $ 9,992 $ 1,378
========= ========
</TABLE>
See accompanying Notes to Financial Statements.
69
<PAGE> 70
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
--------------------- -------------------
For the year ended August 31,
1995 1994 1995 1994
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 10,033 $ 12,784 $ 730 $ 314
Net realized gain (loss) on
investments sold (3,232) (7,257) 22 (293)
Increase (decrease) in net
unrealized appreciation on
investments 3,191 (10,093) 626 (293)
-------- -------- ------- -------
Increase (decrease) in net assets
resulting from operations 9,992 (4,566) 1,378 (272)
-------- -------- ------- -------
Distributions to shareholders from:
Net investment income (10,006) (12,766) (727) (313)
Capital gains -- (3,107) -- --
-------- -------- ------- -------
Total distributions to
shareholders (10,006) (15,873) (727) (313)
-------- -------- ------- -------
Capital Share Transactions:
Proceeds from shares sold 32,379 109,509 14,400 11,250
Net asset value of shares issued
in reinvestment of dividends 7,729 12,609 486 207
Less payments for shares redeemed (73,382) (185,173) (9,696) (6,570)
-------- -------- ------- -------
Increase (decrease) in net assets
from capital share transactions (33,274) (63,055) 5,190 4,887
-------- -------- ------- -------
Total increase (decrease) in net
assets (33,288) (83,494) 5,841 4,302
Net Assets:
Beginning of period 190,479 273,973 7,108 2,806
-------- -------- ------- -------
End of period (including
undistributed net investment
income of $71, $44, $4
and $1, respectively) $157,191 $190,479 $12,949 $ 7,108
======== ======== ======= =======
Number of Fund Shares:
Sold 3,324 10,547 1,535 1,141
Reinvested 794 1,231 51 22
Redeemed (7,560) (18,108) (1,027) (668)
-------- -------- ------- -------
Net increase (decrease) in
shares outstanding (3,442) (6,330) 559 495
Shares Outstanding:
Beginning of period 19,410 25,740 762 267
-------- -------- ------- -------
End of period 15,968 19,410 1,321 762
======== ======== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
70
<PAGE> 71
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Government Bond Fund and the Schwab Long-Term
Government Bond Fund (the "Funds"), are series of Schwab Investments (the
"Trust"), an open-end, management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the two funds described above, the Trust also offers -- the
Schwab 1000 Fund(R), the Schwab California Short/Intermediate Tax-Free Bond
Fund, the Schwab California Long-Term Tax-Free Bond Fund, the Schwab
Short/Intermediate Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond
Fund. The assets of each series are segregated and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income consistent with preservation of capital. The Funds each invest
primarily in securities issued or guaranteed by the United States Government,
its agencies or instrumentalities, and repurchase agreements collateralized by
these securities.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the representative quoted bid and asked prices, or if such prices
are not available, at prices for securities of comparable maturity, quality and
type. Short term securities within 60 days or less of maturity are stated at
amortized cost which approximates market value.
Security transactions and interest income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Interest income is recorded on the
accrual basis and includes amortization of premium and accretion of discount on
investments. Realized gains and losses from security transactions are determined
on an identified cost basis. For callable bonds purchased at a premium, the
excess of the purchase price over the call value is amortized against interest
income through the call date. If the call provision is not exercised, any
remaining premium is amortized through the final maturity date.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by each Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains are recorded on ex-dividend date, payable annually on a calendar year
basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, their initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
71
<PAGE> 72
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
At August 31, 1995, (for financial reporting and federal income tax purposes),
net unrealized appreciation for the Schwab Short/Intermediate Government Bond
Fund aggregated $2,002,000 of which $2,096,000 related to appreciated securities
and $94,000 related to depreciated securities, and net unrealized appreciation
for the Schwab Long-Term Government Bond Fund aggregated $433,000, of which
$449,000 related to appreciated securities and $16,000 related to depreciated
securities.
At August 31, 1995, the Schwab Short/Intermediate Government Bond Fund and the
Schwab Long-Term Government Bond Fund had unused capital loss carryforwards, for
federal income tax purposes, of $8,355,000 and $265,000, respectively. These
carryforwards expire August 31, 2003.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of .41% of each Fund's
average daily net assets. Under this agreement, the Schwab Short/Intermediate
Government Bond Fund and the Schwab Long-Term Government Bond Fund incurred
investment advisory and administration fees of $671,000 and $41,000,
respectively, during the year ended August 31, 1995, before the Investment
Manager reduced its fee (see Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets of each Fund
for transfer agency services and .20% of such assets for shareholder services.
For the year ended August 31, 1995, the Schwab Short/Intermediate Government
Bond Fund and the Schwab Long-Term Government Bond Fund incurred transfer agency
and shareholder service fees of $411,000 and $25,000, respectively, before
Schwab reduced its fees (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1995, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Schwab Short/Intermediate Government Bond
Fund and the Schwab Long-Term Government Bond Fund incurred fees aggregating
$12,000 related to the Trust's unaffiliated trustees.
72
<PAGE> 73
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
During the year ended August 31, 1995, the Investment Manager and Schwab reduced
a portion of their fees and absorbed certain expenses in order to limit each
Fund's ratio of operating expenses to average net assets. The total of such fees
and expenses reduced and absorbed by the Investment Manager were $232,000 and
$92,000 for the Schwab Short/Intermediate Government Bond Fund and the Schwab
Long-Term Government Bond Fund, respectively, and the total of such fees reduced
by Schwab were $143,000 and $25,000 for the Schwab Short/Intermediate Government
Bond Fund and the Schwab Long-Term Government Bond Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1995, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------- -----------
<S> <C> <C>
Purchases $316,982 $27,961
Proceeds of sales and maturities $333,431 $23,060
</TABLE>
73
<PAGE> 74
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Government Bond Fund
-------------------------------------------------------------------------
For the period
November 5, 1991
(commencement
For the eight For the of operations)
For the year ended months ended year ended to
August 31, August 31, December 31, December 31,
1995 1994 1993 1992 1991
---------- ---------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.81 $ 10.64 $ 10.26 $ 10.28 $ 10.00
Income from Investment
- ----------------------
Operations
----------
Net investment income .59 .54 .37 .60 .10
Net realized and
unrealized gain (loss)
on investments .03 (.71) .38 .01 .28
-------- -------- -------- -------- -------
Total from investment
operations .62 (.17) .75 .61 .38
Less Distributions
- ------------------
Dividends from net
investment income (.59) (.54) (.37) (.60) (.10)
Distributions from realized
gain on investments -- (.12) -- (.03) --
-------- -------- -------- -------- -------
Total distributions (.59) (.66) (.37) (.63) (.10)
-------- -------- -------- -------- -------
Net asset value at
end of period $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28
======== ======== ======== ======== =======
Total return (%) 6.61 (1.67) 7.39 6.08 3.79
- ----------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of
period (000s) $157,191 $190,479 $273,973 $226,223 $66,404
Ratio of expenses to
average net assets (%) .58 .60 .60* .43 .35*
Ratio of net investment income
to average net assets (%) 6.11 5.28 5.28* 5.78 6.14*
Portfolio turnover rate (%) 203 91 107 185 4
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab
Short/Intermediate Government Bond Fund for the periods ended August 31, 1995,
1994, 1993, December 31, 1992 and 1991 would have been .81%, .81%, .84%*, .89%
and 1.47%*, respectively, and the ratio of net investment income to average net
assets would have been 5.88%, 5.07%, 5.04%*, 5.32% and 5.02%*, respectively.
* Annualized
74
<PAGE> 75
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Long-Term
Government Bond Fund
------------------------------------------------
For the period
March 5, 1993
(commencement
For the year ended of operations) to
August 31, August 31,
1995 1994 1993
---------- ---------- ------------------
<S> <C> <C> <C>
Net asset value at
beginning of period $ 9.33 $10.53 $10.00
Income from Investment Operations
- ---------------------------------
Net investment income .69 .60 .31
Net realized and unrealized gain (loss)
on investments .47 (1.20) .53
------- ------ ------
Total from investment operations 1.16 (.60) .84
Less Distributions
- ------------------
Dividends from net investment income (.69) (.60) (.31)
Distributions from realized gain on investments -- -- --
------- ------ ------
Total distributions (.69) (.60) (.31)
------- ------ ------
Net asset value at end of period $ 9.80 $ 9.33 $10.53
======= ====== ======
Total return (%) 13.03 (5.80) 8.63
- ----------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (000s) $12,949 $7,108 $2,806
Ratio of expenses to average net assets (%) .00 .10 .26*
Ratio of net investment income to
average net assets (%) 7.38 6.27 6.36*
Portfolio turnover rate (%) 240 123 42
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab Long-Term
Government Bond Fund for the periods ended August 31, 1995, 1994 and 1993 would
have been 1.18%, 2.19% and 19.19%*, respectively, and the ratio of net
investment income to average net assets would have been 6.20%, 4.18% and
(12.57%)*, respectively.
* Annualized
75
<PAGE> 76
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Trustees
and Shareholders of the Schwab Short/Intermediate Government Bond Fund
and the Schwab Long-Term Government Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets present fairly, in all material respects, the financial
position of the Schwab Short/Intermediate Government Bond Fund and the Schwab
Long-Term Government Bond Fund (two series constituting part of Schwab
Investments, hereafter referred to as the "Trust") at August 31, 1995, and the
results of their operations and the changes in their net assets for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1995 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 29, 1995
76
<PAGE> 77
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--3.3%(a)
CALIFORNIA--1.4%
Irvine Ranch, California Water
District Consolidated General
Obligation Improvement Bonds
Series 1989 Various Districts/
(Industrial Bank of Japan LOC)
(VMIG1 A-1)
3.60%, 09/01/95 $ 100 $ 100
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds Series
1985B-2/(Sumitomo Bank LOC)
(- A-1)
3.60%, 09/01/95 600 600
-------
700
-------
WYOMING--1.9%
Lincoln County, Wyoming
Pollution Control Revenue
Bonds (Exxon Project) Series A
(P-1 A-1+)
3.35%, 09/01/95 1,000 1,000
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $1,700) 1,700
-------
MUNICIPAL BONDS--92.6%(b)
ALASKA--2.3%
Anchorage, Alaska Refunding
Schedule Series A/(MBIA
Insurance) (Aaa AAA)
5.10%, 08/01/99 1,145 1,175
-------
ARIZONA--4.0%
Phoenix, Arizona Civic
Improvement Corp. Wastewater
Systems Lease Revenue Bonds
(A1 A)
5.10%, 07/01/99 1,005 1,031
Phoenix, Arizona Street and
Highway Revenue User Refunding
Bonds (A1 AA)
5.95%, 07/01/00 1,000 1,063
-------
2,094
-------
ILLINOIS--2.2%
Illinois Health Facilities
Authority Revenue Bonds (OSF
Healthcare System) (A1 A+)
5.125%, 11/15/00 1,145 1,144
-------
INDIANA--1.5%
Indiana University Revenue
Bonds (Student Fee) Series J
(Aa AA-)
4.00%, 08/01/97 800 799
-------
IOWA--7.4%
Black Hawk County, Iowa
Hospital Facilities Revenue
Bonds (Allen Memorial
Hospital)/(AMBAC Insurance)
(Aaa AAA)
7.375%, 02/01/01 2,000 2,315
Le Claire, Iowa Electric
Revenue Bonds Series B
(- SP-1+)
4.125%, 09/01/96 1,495 1,499
-------
3,814
-------
KENTUCKY--5.2%
Kentucky Housing Corporation
Housing Revenue Bonds
Series B/ (Multiple
Credit Enhancements)
(Aaa AAA)
4.45%, 07/01/00 $1,000 $ 994
Kentucky State Property and
Buildings Commission Revenue
Refunding Bonds (Project 55)
(A A+)
4.15%, 09/01/99 1,735 1,713
-------
2,707
-------
MARYLAND--11.4%
Maryland State Department of
Transportation Second Issue
Series 1990 (Aa AA)
6.375%, 11/01/98 2,500 2,669
Washington, Maryland
Suburban Sanitation District
General Obligation Bonds
(Aa1 AA)
6.00%, 11/01/99 3,000 3,206
-------
5,875
-------
MASSACHUSETTS--12.0%
Massachusetts Municipal
Wholesale Electric Company
Power Supply Systems Revenue
Bonds Series E/ (AMBAC
Insurance) (Aaa AAA)
5.50%, 07/01/00 2,000 2,085
Massachusetts State
Conservation Loan General
Obligation Bonds Series A (A1
A+)
4.40%, 11/01/98 1,625 1,639
Massachusetts State Health
and Educational Facilities
Authority Revenue Bonds
(Brigham and Womens
Hospital) Series E
(A1 A+)
4.40%, 07/01/00 1,000 978
Massachusetts State Housing
Finance Agency Bonds (Housing
Project) Series A (A1 A+)
4.60%, 04/01/97 1,500 1,502
-------
6,204
-------
MINNESOTA--2.1%
Minneapolis, Minnesota
Community Development Agency
Tax Increment Revenue
Bonds/(MBIA Insurance)
(Aaa AAA)
7.00%, 09/01/00 1,000 1,111
-------
MISSISSIPPI--4.0%
Mississippi Hospital Equipment
& Facilities Authority Revenue
Refunding Bond (Mississippi
Baptist Medical Center)/
(MBIA Insurance)
(Aaa AAA)
5.25%, 05/01/01 2,000 2,058
-------
</TABLE>
77
<PAGE> 78
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MISSOURI--1.0%
Missouri State Environmental
Improvement & Energy Resources
Authority Water Pollution
Control Revenue Bonds Series A
(Aa -)
5.80%, 07/01/99 $ 500 $ 529
-------
NEW JERSEY--3.0%
Passaic Valley, New Jersey
Sewer Commissioners Revenue
Refunding Bonds (Sewer System)
Series D/(AMBAC Insurance)
(Aaa AAA)
5.70%, 12/01/97 1,520 1,575
-------
NORTH CAROLINA--2.2%
North Carolina Municipal Power
Agency Revenue Refunding Bonds
(Catawba Electric) (A A-)
4.50%, 01/01/96 1,115 1,115
-------
OHIO--4.0%
Ohio State Water Development
Authority Revenue Refunding
Bonds (Safe Water)/(MBIA
Insurance) (Aaa AAA)
4.95%, 12/01/98 2,000 2,055
-------
PENNSYLVANIA--2.9%
Pennsylvania State General
Purpose Public Improvement
Refunding Second Series
General Obligation Bonds (A1
AA-)
4.75%, 06/15/97 1,500 1,523
-------
SOUTH CAROLINA--6.6%
Charleston, South Carolina
Certificates of Participation
Public Improvement Project/
(AMBAC Insurance) (Aaa AAA)
4.30%, 09/01/00 1,085 1,061
Greenville Hospital System,
South Carolina Hospital
Facilities Revenue Refunding
Bonds Series C (- AA-)
5.00%, 05/01/00 1,090 1,090
South Carolina State Public
Service Authority
Power/Electric Revenue
Refunding Bonds Series A (A1
A+)
5.60%, 07/01/00 1,200 1,256
-------
3,407
-------
TEXAS--14.0%
Houston, Texas General
Obligation Bonds Series A
(Aa AA-)
5.20%, 03/01/00 1,000 1,035
5.30%, 03/01/01 1,000 1,035
Houston, Texas Water Conveyance
System Contract Certificates
of Participation Series
E/(AMBAC Insurance) (Aaa AAA)
5.50%, 12/15/97 $1,000 $1,033
Tarrant County, Texas Water
Control Improvement District
No.1 Water Revenue Refunding
Bonds Series 1992 (A1 AA)
5.40%, 03/01/99 2,000 2,068
Tarrant County, Texas Water
Control Improvement District
No.1 Water Revenue Refunding
Bonds Series 1993 (A1 AA)
4.25%, 03/01/00 1,000 988
Texas Municipal Power Agency
Revenue Refunding Bonds/ (MBIA
Insurance) (Aaa AAA)
6.25%, 09/01/97 1,000 1,061
-------
7,220
-------
WASHINGTON--6.8%
Washington State Certificates
of Participation (State
Equipment) Series B (A A)
4.125%, 04/01/97 1,500 1,493
Washington State Public Power
Supply System Revenue
Refunding Bonds (Nuclear
Project #2) Series A (Aa AA)
4.625%, 07/01/98 2,000 2,005
-------
3,498
-------
TOTAL MUNICIPAL BONDS
(Cost $47,364)
47,903
-------
REVENUE ANTICIPATION WARRANTS--3.9%(b)
CALIFORNIA--3.9%
California State Revenue
Anticipation Warrants Series
C/ (Multiple Credit
Enhancements) (MIG1 SP-1)
5.75%, 04/25/96 2,000 2,019
-------
TOTAL REVENUE ANTICIPATION WARRANTS
(Cost $2,027) 2,019
-------
<CAPTION>
Shares
------
<S> <C> <C>
SHORT-TERM INVESTMENTS--0.2%(c)
Provident Institutional Funds -
MuniFund
3.16%, 09/07/95 99 99
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $99)
99
-------
TOTAL INVESTMENTS--100.0%
(Cost $51,190) $51,721
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
78
<PAGE> 79
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
-------- --------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--7.4%(a)
CALIFORNIA--5.4%
California Pollution
Control Financing
Authority Pollution
Control Revenue Bonds
(Southern California
Edison) Series 1986D
(VMIG1 A-1+)
3.45%, 09/01/95 $ 200 $ 200
Irvine Ranch, California
Water District
Consolidated Revenue
Refunding Bonds Series
1985B-2/(Sumitomo Bank
LOC) (- A-1)
3.60%, 09/01/95 100 100
Irvine Ranch, California
Water District Improvement
District No. 282 Series
1988A/(Sumitomo Bank LOC)
(- A-1)
3.60%, 09/01/95 1,900 1,900
--------
2,200
--------
LOUISIANA--0.8%
Louisiana Public Facilities
Authority Revenue Bonds
Industrial Development
(Kenner Hotel, Ltd.)/
(Swiss Bank LOC) (P-1 -)
3.50%, 09/01/95 300 300
--------
WYOMING--1.2%
Lincoln County, Wyoming
Pollution Control Revenue
Bonds (Exxon Corp.) Series
1984C (P-1 A-1+)
3.35%, 09/01/95 500 500
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $3,000) 3,000
--------
MUNICIPAL BONDS--92.6%(b)
ALASKA--10.6%
Kodiak Island Borough,
Alaska General Obligations
Series 1994A/(AMBAC
Insurance) (Aaa AAA)
5.40%, 02/15/10 2,500 2,425
Valdez, Alaska Marine
Terminal Revenue Refunding
Bonds (BP Pipelines, Inc.
Project) Series A (A1 AA-)
5.85%, 08/01/25 2,000 1,898
--------
4,323
--------
ARIZONA--5.4%
Maricopa County, Arizona--
Alhambra Elementary School
District 68 Series
1994A/(AMBAC Insurance)
(Aaa AAA)
6.80%, 07/01/12 2,000 2,205
--------
CALIFORNIA--12.6%
Madera County, California
Certificates of
Participation (Valley
Children's Hospital)/(MBIA
Insurance) (Aaa AAA)
6.125%, 03/15/23 $2,000 $2,008
San Bernardino County,
California Certificates of
Participation (Medical
Center Financing Project)
Series A/(MBIA Insurance)
(Aaa AAA)
5.50%, 08/01/22 500 462
San Francisco, California
Downtown Parking Corp.
Parking Revenue Bonds
(A -)
6.65%, 04/01/18 500 511
Santa Clara County,
California Financing
Authority Lease Revenue
Bonds (VMC Facility
Replacement Project)
Series A/(AMBAC Insurance)
(Aaa AAA)
7.75%, 11/15/10 1,000 1,220
University of California
Certificates of
Participation (UCLA
Central Chiller
Cogeneration Facilities)
(Aa -)
5.30%, 11/01/08 1,000 954
--------
5,155
--------
CONNECTICUT--2.4%
Connecticut State Housing
Finance Authority (Housing
Mortgage Finance Program)
Series B1 Subseries B1
(Aa AA)
7.55%, 11/15/08 925 993
--------
FLORIDA--5.9%
Jacksonville, Florida
Electric Authority Revenue
Refunding Bonds
(St. John River)
Issue 2 Series 10
(Aa1 AA)
5.30%, 10/01/08 2,400 2,394
--------
ILLINOIS--4.1%
Illinois State Dedicated
Tax Revenue Bonds
(Civic Center)/
(AMBAC Insurance)
(Aaa AAA)
6.25%, 12/15/20 500 524
Illinois State Toll Highway
Authority Priority Revenue
Bonds Series A (A1 A+)
6.375%, 01/01/15 1,100 1,129
--------
1,653
--------
</TABLE>
79
<PAGE> 80
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
-------- --------
<S> <C> <C>
IOWA--2.7%
Ames, Iowa Hospital Revenue
Bonds (Mary Greeley
Medical Center Project)
Series 1993/(AMBAC
Insurance) (Aaa AAA)
5.70%, 08/15/12 $ 500 $ 495
Cedar Rapids, Iowa Hospital
Facilities Revenue Bonds
(St. Luke's Methodist
Project) Series 1993/
(FGIC Insurance) (Aaa AAA)
6.125%, 08/15/13 600 602
--------
1,097
--------
MASSACHUSETTS--7.7%
Massachusetts Bay
Transportation Authority
(General Transportation
System) Series A (A1 A+)
5.75%, 03/01/18 1,400 1,369
Massachusetts State Health
and Educational Facilities
Authority Revenue Bonds
(Brigham and Womens
Hospital) Series E (A1 A+)
5.10%, 07/01/07 1,000 959
Massachusetts State Housing
Finance Agency Multi
Family Residential Housing
Revenue Bonds (FHA Section
8) Series A (A A+)
7.80%, 08/01/22 800 831
--------
3,159
--------
MISSISSIPPI--5.3%
Mississippi Hospital
Equipment & Facilities
Authority (Mississippi
Baptist Medical Center)/
(MBIA Insurance) (Aaa AAA)
6.00%, 05/01/13 2,150 2,169
--------
MISSOURI--4.8%
Kansas City, Missouri
School District Building
(Elementary School
Project) Series 1993D/
(FGIC Insurance) (Aaa AAA)
5.15%, 02/01/08 1,000 984
Kansas City, Missouri
School District Building
Corp. (Capital Improvement
Project) Series 1993/
(FGIC Insurance) (Aaa AAA)
5.15%, 02/01/08 1,000 984
--------
1,968
--------
NEW HAMPSHIRE--1.8%
New Hampshire Higher
Educational & Health
Facilities Authority
Revenue Bonds (Mary
Hitchcock Memorial
Hospital) Series A/(FGIC
Insurance) (Aaa AAA)
5.25%, 08/15/08 $ 750 $ 736
--------
PENNSYLVANIA--6.2%
Lehigh County, Pennsylvania
Industrial Development
Authority Pollution
Control Revenue Bonds
Series A/ (MBIA Insurance)
(Aaa AAA)
6.40%, 11/01/21 1,500 1,553
Philadelphia, Pennsylvania
Hospitals and Higher
Education Facilities
Authority Revenue
Refunding Bonds (Childrens
Hospital) (Aa AA)
5.25%, 02/15/08 1,000 963
--------
2,516
--------
RHODE ISLAND--2.5%
Rhode Island Housing and
Mortgage Financing
Corporation Series 10A
(Aa AA+)
6.50%, 10/01/22 1,000 1,005
--------
SOUTH CAROLINA--3.7%
Piedmont Municipal Power
Agency, South Carolina
Electric Revenue Refunding
Bonds/(MBIA Insurance)
(Aaa AAA)
6.20%, 01/01/08 1,400 1,523
--------
TEXAS--11.2%
Copperas Cove, Texas Health
Facilities Development
Corp. (Adventist Health
Systems)/(MBIA Insurance)
(Aaa AAA)
5.875%, 11/15/25 1,500 1,466
San Antonio, Texas Electric
and Gas Refunding Bonds
Series 1992 (Aa1 AA)
5.75%, 02/01/11 1,000 993
Texas State Public
Financing Authority
General Obligation Bonds
Series B (Aa AA)
5.75%, 10/01/14 1,025 1,016
University of Texas Revenue
Refunding Bonds Series B
(Aa1 AA)
6.75%, 08/15/13 1,000 1,073
--------
4,548
--------
</TABLE>
See accompanying Notes to Schedules of Investments.
80
<PAGE> 81
\
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
-------- --------
<S> <C> <C>
WASHINGTON--5.7%
Seattle, Washington
Municipal Light and Power
Revenue Refunding Bonds
(Aa AA)
5.40%, 05/01/08 $2,300 $ 2,314
-------
TOTAL MUNICIPAL BONDS
(Cost $36,831)
37,758
-------
SHORT-TERM INVESTMENTS--0.0%(c)
Provident Institutional Funds -
MuniFund
3.16%, 09/07/95 17 17
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $17) 17
-------
TOTAL INVESTMENTS--100.0%
(Cost $39,848) $40,775
=======
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS.
Parenthetical disclosures which follow each security represent
independent bond ratings, where available, as provided by Moody
Investor Services, Inc. and Standard & Poor's Corporation, which were
in effect at August 31, 1995. These ratings are unaudited.
(a) Variable rate securities. Interest rates vary periodically based on
current market rates. Rates shown are the effective rates on August 31,
1995. Dates shown represent the latter of the demand date or next
interest rate change date, which is considered the maturity date for
financial reporting purposes. For variable rate securities without
demand features and which mature in less than one year the next
interest reset date is shown.
(b) Interest rates represent coupon rate of security.
(c) Interest rates represent the yield on August 31, 1995.
<TABLE>
<Caption)
Abbreviations
-------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
MBIA Municipal Bond Investors Assurance Corporation
VMIG Variable Moody's Investment Guide
SBPA Stand-By Purchase Agreement
</TABLE>
See accompanying Notes to Financial Statements.
81
<PAGE> 82
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $51,190 and $39,848, respectively) $51,721 $40,775
Interest receivable 768 590
Receivable for fund shares sold 111 88
Deferred organization costs 46 33
Prepaid expenses 7 3
------- -------
Total assets 52,653 41,489
------- -------
LIABILITIES
Payable for:
Dividends 34 34
Fund shares redeemed 54 --
Deferred organization costs -- 4
Investment advisory and administration
fee 14 11
Transfer agency and
shareholder service fees 3 5
Other 44 22
------- -------
Total liabilities 149 76
------- -------
Net assets applicable to outstanding shares $52,504 $41,413
======= =======
NET ASSETS CONSIST OF:
Capital paid in $52,647 $41,282
Accumulated undistributed
net investment income 13 15
Accumulated net realized loss
on investments sold (687) (813)
Net unrealized appreciation
on investments 531 929
------- -------
$52,504 $41,413
======= =======
THE PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 5,188 4,076
Net asset value, offering and
redemption price per share $10.12 $10.16
</TABLE>
See accompanying Notes to Financial Statements.
82
<PAGE> 83
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Interest income $ 2,533 $ 2,462
-------- --------
Expenses:
Investment advisory and administration
fee 227 169
Transfer agency and
shareholder service fees 139 103
Custodian fees 39 31
Registration fees 30 24
Professional fees 13 11
Shareholder reports 17 13
Trustees' fees 4 3
Amortization of deferred organization
costs 15 17
Insurance and other expenses 13 13
-------- --------
497 384
Less expenses reduced (225) (160)
-------- --------
Total expenses incurred by Fund 272 224
-------- --------
Net investment income 2,261 2,238
-------- --------
Net realized gain (loss) on investments:
Proceeds from sales of investments 77,877 78,910
Cost of investments sold (78,325) (79,716)
-------- --------
Net realized loss on investments sold (448) (806)
-------- --------
Change in net unrealized appreciation
(depreciation) on investments:
Beginning of period (841) (671)
End of period 531 929
-------- --------
Increase in net unrealized
appreciation on investments 1,372 1,600
-------- --------
Increase in net assets resulting from
operations $ 3,185 $ 3,032
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
83
<PAGE> 84
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
----------------- -----------------
For the year ended August 31,
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,261 $ 2,488 $ 2,238 $ 2,408
Net realized gain (loss) on
investments sold (448) (265) (806) 286
Increase (decrease) in net unrealized
appreciation (depreciation) on
investments 1,372 (1,522) 1,600 (2,951)
------- ------- ------- -------
Increase (decrease) in net assets
resulting from operations 3,185 701 3,032 (257)
------- ------- ------- -------
Distributions to shareholders from:
Net investment income (2,255) (2,485) (2,232) (2,404)
Capital gains -- -- -- (371)
------- ------- ------- -------
Total distributions to shareholders (2,255) (2,485) (2,232) (2,775)
------- ------- ------- -------
Capital Share Transactions:
Proceeds from shares sold 17,344 50,244 21,437 28,434
Net asset value of shares issued
in reinvestment of dividends 1,746 1,957 1,626 2,069
Less payments for shares redeemed (31,405) (40,978) (26,425) (33,909)
------- ------- ------- -------
Increase (decrease) in net assets from
capital share transactions (12,315) 11,223 (3,362) (3,406)
------- ------- ------- -------
Total increase (decrease) in net assets (11,385) 9,439 (2,562) (6,438)
Net Assets:
Beginning of period 63,889 54,450 43,975 50,413
------- ------- ------- -------
End of period (including undistributed net
investment income of $13, $7, $15
and $9, respectively) $52,504 $63,889 $41,413 $43,975
======= ======= ======= =======
Number of Fund Shares:
Sold 1,754 4,963 2,196 2,769
Reinvested 176 195 166 200
Redeemed (3,185) (4,079) (2,707) (3,311)
------- ------- ------- -------
Net increase (decrease) in
shares outstanding (1,255) 1,079 (345) (342)
Shares Outstanding:
Beginning of period 6,443 5,364 4,421 4,763
------- ------- ------- -------
End of period 5,188 6,443 4,076 4,421
======= ======= ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
84
<PAGE> 85
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Tax-Free Bond Fund and the Schwab Long-Term
Tax-Free Bond Fund (the "Funds"), are series of Schwab Investments (the
"Trust"), an open-end, management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the two funds described above, the Trust also offers -- the
Schwab 1000 Fund(R), the Schwab Short/Intermediate Government Bond Fund, the
Schwab Long-Term Government Bond Fund, the Schwab California Short/Intermediate
Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund. The
assets of each series are segregated and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income that is exempt from federal income tax, consistent with
preservation of capital. The Funds, which are not "diversified" within the
meaning of the Investment Company Act of 1940, as amended, each invest primarily
in debt obligations issued by or on behalf of states, territories and
possessions of the United States Government, its agencies or instrumentalities,
the interest of which is not subject to federal income tax.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the representative quoted bid and asked prices, or if such prices
are not available, at prices for securities of comparable maturity, quality and
type. Short term securities within 60 days or less of maturity are stated at
amortized cost which approximates market value.
Security transactions and interest income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Interest income is recorded on the
accrual basis and includes amortization of premium on investments. Realized
gains and losses from security transactions are determined on an identified cost
basis. For callable bonds purchased at a premium, the excess of the purchase
price over the call value is amortized against interest income through the call
date. If the call provision is not exercised, any remaining premium is amortized
through the final maturity date.
Dividends to shareholders -- Each Fund declares a daily dividend, from net
investment income for that day, payable monthly. Distributions of net capital
gains are recorded on ex-dividend date, payable annually on a calendar year
basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, their initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
85
<PAGE> 86
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
All distributions paid by the Schwab Short/Intermediate Tax-Free Bond Fund and
the Schwab Long-Term Tax-Free Bond Fund during the year ended August 31, 1995
qualify as exempt-interest dividends for federal tax purposes.
At August 31, 1995, (for financial reporting and federal income tax purposes),
net unrealized appreciation for the Schwab Short/Intermediate Tax-Free Bond Fund
aggregated $531,000, of which $614,000 related to appreciated securities and
$83,000 related to depreciated securities, and net unrealized appreciation for
the Schwab Long-Term Tax-Free Bond Fund aggregated $929,000, of which $1,097,000
related to appreciated securities and $168,000 related to depreciated
securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of .41% of each Fund's
average daily net assets. Under this agreement, the Schwab Short/Intermediate
Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond Fund incurred
investment advisory and administration fees of $227,000 and $169,000,
respectively, during the year ended August 31, 1995, before the Investment
Manager reduced its fee (see Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets of each Fund
for transfer agency services and .20% of such assets for shareholder services.
For the year ended August 31, 1995, the Schwab Short/Intermediate Tax-Free Bond
Fund and the Schwab Long-Term Tax-Free Bond Fund incurred transfer agency and
shareholder service fees of $139,000 and $103,000, respectively, before Schwab
reduced its fees (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers or directors of the Investment Manager and Schwab. During the year
ended August 31, 1995, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Schwab Short/Intermediate Tax-Free Bond
Fund and the Schwab Long-Term Tax-Free Bond Fund incurred fees aggregating
$7,000 related to the Trust's unaffiliated trustees.
86
<PAGE> 87
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
During the year ended August 31, 1995, the Investment Manager and Schwab reduced
a portion of their fees in order to limit each Fund's ratio of operating
expenses to average net assets. The total of such fee reductions by the
Investment Manager were $130,000 and $80,000 for the Schwab Short/Intermediate
Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond Fund, respectively,
and the total of such fee reductions by Schwab were $95,000 and $80,000 for the
Schwab Short/Intermediate Tax-Free Bond Fund and the Schwab Long-Term Tax-Free
Bond Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1995, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
<S> <C> <C>
Purchases $18,603 $27,889
Proceeds of sales and maturities $32,986 $29,264
</TABLE>
87
<PAGE> 88
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Tax-Free Bond Fund
-------------------------------------------------
For the period
April 21, 1993
(commencement
For the year ended of operations) to
August 31, August 31,
1995 1994 1993
------------ ------------ -----------------
<S> <C> <C> <C>
Net asset value at beginning of period $ 9.92 $ 10.15 $ 10.00
Income from Investment Operations
- ---------------------------------
Net investment income .40 .37 .13
Net realized and unrealized gain (loss) on investments .20 (.23) .15
------- ------- -------
Total from investment operations .60 .14 .28
Less Distributions
- ------------------
Dividends from net investment income (.40) (.37) (.13)
Distributions from realized gain on investments -- -- --
------- ------- -------
Total distributions (.40) (.37) (.13)
------- ------- -------
Net asset value at end of period $ 10.12 $ 9.92 $ 10.15
======= ======= =======
Total return (%) 6.23 1.42 2.83
- ----------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (000s) $52,504 $63,889 $54,450
Ratio of expenses to average net assets (%) .49 .48 .45*
Ratio of net investment income to average net assets
(%) 4.06 3.71 3.63*
Portfolio turnover rate (%) 35 19 11
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab
Short/Intermediate Tax-Free Bond Fund for the periods ended August 31, 1995,
1994 and 1993 would have been .89%, .91% and 1.26%*, respectively, and the ratio
of net investment income to average net assets would have been 3.66%, 3.28% and
2.82%*, respectively.
* Annualized
88
<PAGE> 89
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Long-Term
Tax-Free Bond Fund
-------------------------------------------------------
For the period
For the September 11, 1992
eight (commencement
For the year ended months ended of operations) to
August 31, August 31, December 31,
1995 1994 1993 1992
-------- -------- ------------ ------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.95 $ 10.59 $ 9.92 $ 10.00
Income from Investment Operations
- ---------------------------------
Net investment income .53 .52 .36 .17
Net realized and unrealized gain (loss)
on investments .21 (.56) .67 (.08)
------- ------- ------- -------
Total from investment operations .74 (.04) 1.03 .09
Less Distributions
- ------------------
Dividends from net investment income (.53) (.52) (.36) (.17)
Distributions from realized gain on investments -- (.08) -- --
------- ------- ------- -------
Total distributions (.53) (.60) (.36) (.17)
------- ------- ------- -------
Net asset value at end of period $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= =======
Total return (%) 7.76 (.42) 10.56 .92
- ----------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (000s) $41,413 $43,975 $50,413 $28,034
Ratio of expenses to average net assets (%) .54 .51 .45* .45*
Ratio of net investment income
to average net assets (%) 5.40 5.05 5.30* 5.61*
Portfolio turnover rate (%) 70 62 91 54
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab Long-Term
Tax-Free Bond Fund for the periods ended August 31, 1995, 1994, 1993 and
December 31, 1992 would have been .93%, .99%, 1.18%* and 1.53%*, respectively,
and the ratio of net investment income to average net assets would have been
5.01%, 4.57%, 4.57%* and 4.53%*, respectively.
* Annualized
89
<PAGE> 90
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Trustees
and Shareholders of the Schwab Short/Intermediate Tax-Free Bond Fund and
the Schwab Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets present fairly, in all material respects, the financial
position of the Schwab Short/Intermediate Tax-Free Bond Fund and the Schwab
Long-Term Tax-Free Bond Fund (two series constituting part of Schwab
Investments, hereafter referred to as the "Trust") at August 31, 1995, and the
results of their operations and the changes in their net assets for the periods
presented, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1995 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 29, 1995
90
<PAGE> 91
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE
OBLIGATIONS--1.7%(a)
Irvine Ranch, California Water
District Consolidated
Revenue Refunding Bonds Series
1985B-2/(Sumitomo Bank LOC)
(- A-1)
3.60%, 09/01/95 $ 200 $ 200
Irvine Ranch, California Water
District Election 1988
Waterworks Improvement
District 182, Series A/
(Sumitomo Bank LOC)
(- A-1)
3.60%, 09/01/95 500 500
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $700) 700
-------
TAX AND REVENUE
ANTICIPATION NOTES--15.0%(b)
San Diego County, California
Tax and Revenue Anticipation
Notes (MIG1 SP-1)
4.50%, 09/30/96 2,000 2,009
San Diego, California Area
Local Governments Pooled
Tax and Revenue
Anticipation Notes/
(Mitsubishi Bank LOC)
(- SP-1+)
4.75%, 10/18/96 2,000 2,013
San Diego, California Unified
School District Tax and
Revenue Anticipation Notes
Series A/(Westdeutsche
Landesbank LOC)
(MIG1 -)
4.75%, 10/10/96 2,000 2,013
-------
TOTAL TAX AND REVENUE ANTICIPATION
NOTES (Cost $6,035) 6,035
-------
MUNICIPAL BONDS--83.1%(b)
California Health Facilities
Financing Authority Revenue
Bonds (Downey Community
Hospital) (- A-)
4.75%, 05/15/99 2,220 2,181
California Housing Finance
Agency Revenue Bonds
Home Mortgage Series G
(Aa AA-)
5.65%, 02/01/98 500 509
5.65%, 08/01/98 585 597
5.85%, 08/01/99 320 329
6.00%, 08/01/00 410 423
California State Public Works
Board Lease Revenue Refunding
Bonds (California Community
College Project) Series 1993A
(A A-)
4.70%, 12/01/99 1,000 999
California State Public Works
Board Lease Revenue Refunding
Bonds (California State
University) Series A (A A-)
4.30%, 12/01/99 2,000 1,955
California State Public Works
Board Lease Revenue Refunding
Bonds (Department of
Corrections State Prisons)
Series A/(AMBAC Insurance)
(Aaa AAA)
4.70%, 12/01/00 1,865 1,884
California State Public Works
Board Lease Revenue Refunding
Bonds (Department of
Corrections - California State
Prison - Susanville) Series D
(A A-)
4.40%, 06/01/00 1,000 978
California State Public Works
Board Lease Revenue Refunding
Bonds (Various University of
California Projects) Series A
(A A-)
4.70%, 06/01/00 1,020 1,016
California Statewide
Communities Development
Authority Revenue Refunding
Bonds Certificate of
Participation (Cedars - Sinai
Medical Center) (A1 -)
4.40%, 11/01/00 1,235 1,175
California Statewide Community
Development Authority Revenue
Bonds Certificate of
Participation (St. Joseph
Health Systems) (Aa AA)
5.30%, 07/01/00 2,035 2,066
Contra Costa County, California
Transportation Authority Sales
Tax Revenue Bonds Series A/
(FGIC Insurance) (Aaa AAA)
4.80%, 03/01/01 1,000 1,009
Foothill, California Transit
Zone Certificates of
Participation Refunding Bond
Referendum Series A (Baa1 -)
4.50%, 05/01/97 1,000 991
4.50%, 11/01/97 1,000 989
Garden Grove, California
Community Development Projects
Tax Allocation Refunding Bonds
(- A)
4.70%, 10/01/98 1,060 1,048
Los Angeles County, California
Public Works Financing
Authority District Revenue
Refunding Bonds (Capital
Construction) (Aa1 AA-)
4.30%, 03/01/00 1,090 1,087
</TABLE>
91
<PAGE> 92
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Los Angeles, California
Convention & Exhibit Center
Authority Certificates of
Participation Series A/
(Escrowed to Maturity with
Government Securities)
(Aaa AAA)
7.375%, 08/15/99 $1,000 $ 1,128
Los Angeles, California State
Building Authority Revenue
Refunding Bonds (California
Department of General
Services) Series A (A A-)
4.50%, 05/01/98 400 399
4.70%, 05/01/99 450 448
Los Angeles, California Unified
School District Certificates
of Participation (Multiple
Properties) Series 1994B/
(AMBAC Insurance) (Aaa AAA)
5.70%, 12/01/99 3,215 3,384
Los Angeles, California
Wastewater System Revenue
Bonds Series A (A1 A)
6.60%, 02/01/99 1,775 1,886
Morgan Hill, California Unified
School District Certificates
of Participation (A1 -)
4.80%, 08/01/99 510 509
Port of Long Beach, California
Harbor Revenue Bonds
(Aa AA-)
7.10%, 05/15/99 2,000 2,188
San Francisco, California Port
Commission Revenue Refunding
Bonds (A BBB+)
5.00%, 07/01/00 1,500 1,526
San Ramon Valley, California
Unified School District
Certificates of Participation
(Measure A Capital Project)
Series A (A -)
4.90%, 10/01/99 1,100 1,084
Santa Monica, California
Wastewater Enterprise
Revenue-Hyperion Project
Series A (A1 A+)
6.25%, 01/01/02 1,250 1,384
Stockton, California Health
Facilities Revenue Bonds (St.
Joseph Medical Center) Series
A/(MBIA Insurance) (Aaa AAA)
4.60%, 06/01/00 200 197
-------
TOTAL MUNICIPAL BONDS
(Cost $33,043)
33,369
-------
</TABLE>
<TABLE>
<CAPTION>
Shares
------
<S> <C> <C>
SHORT-TERM INVESTMENTS--0.2%(c)
Provident Institutional
Funds -
California Money Fund
Portfolio
3.32%, 09/07/95 74 74
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $74)
74
-------
TOTAL INVESTMENTS--100.0%
(Cost $39,852) $40,178
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
92
<PAGE> 93
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE
OBLIGATIONS--1.0%(a)
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds Series
1985B-2/(Sumitomo Bank LOC)
(- A-1)
3.60%, 09/01/95 $ 300 $ 300
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds Series
1985B-3/(Sumitomo Bank LOC)
(- A-1)
3.60%, 09/01/95 100 100
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds Series A/
(Industrial Bank of Japan LOC)
(VMIG1 A-1)
3.60%, 09/01/95 400 400
Irvine Ranch, California Water
District Improvement District
No. 284 Series A/(Sumitomo
Bank LOC) (- A-1)
3.60%, 09/01/95 100 100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $900) 900
-------
MUNICIPAL BONDS--99.0%(b)
Alameda County, California
Certificates of Participation
(Capital Projects) (A A)
6.25%, 06/01/06 1,000 1,028
Alta Loma, California
Elementary School District
Series 2 General Obligation
Bonds/(AMBAC Insurance)
(Aaa AAA)
5.875%, 06/01/08 840 868
5.875%, 06/01/09 860 882
Antioch Area, Public Facilities
Financing Agency California
Special Tax Series 89-1/
(FGIC Insurance) (Aaa AAA)
5.25%, 08/01/07 1,985 1,970
Bakersfield, California
Hospital Revenue Bonds
(Bakersfield Memorial
Hospital) Series A (A A-)
6.50%, 01/01/22 1,000 1,003
California Educational
Facilities Authority Revenue
Bonds (Loyola Marymount
University) Series B (A1 -)
6.60%, 10/01/22 1,450 1,510
California Educational
Facilities Authority Revenue
Bonds (Mills College) (A -)
6.875%, 09/01/22 500 523
California Educational
Facilities Authority Revenue
Bonds (Saint Mary's College)
(A -)
5.00%, 10/01/12 3,000 2,693
California Health Facilities
Financing Authority Revenue
Bonds (Association of Retarded
Citizens)/(California Mortgage
Insurance) (- A)
7.00%, 05/01/21 455 470
California Health Facilities
Financing Authority Revenue
Bonds (Marshall Hospital)
Series A/(California Mortgage
Insurance) (- A)
6.625%, 11/01/22 4,000 4,025
California Housing Finance
Agency Home Mortgage Revenue
Bonds Series G (Aa AA-)
7.20%, 08/01/14 3,000 3,203
California Housing Finance
Agency Multi Unit Rental
Housing Revenue Bonds Series
BII 1992 (A1 A+)
6.70%, 08/01/15 1,000 1,024
California State Public Works
Board Lease Revenue Refunding
Bonds (Various California
State University Projects)
Series A (A A-)
6.70%, 10/01/17 1,250 1,298
California State Public Works
Board Lease Revenue Refunding
Bonds (Various University of
California Projects) Series A
(A A-)
5.50%, 06/01/10 3,000 2,846
California Statewide
Communities Development
Authority Certificates of
Participation Revenue Bonds
(Cedars-Sinai Medical Center)
Series 1992 (A1 -)
6.50%, 08/01/15 1,250 1,281
California Statewide
Communities Development
Authority Hospital Revenue
Bonds Certificates of
Participation (Saint Joseph
Health Systems) (Aa AA)
6.50%, 07/01/15 2,000 2,078
Central Coast Water Authority
Revenue Bonds (State Water
Project Regional Facilities)/
(AMBAC Insurance) (Aaa AAA)
6.60%, 10/01/22 1,500 1,581
Chico, California Unified
School District General
Obligations Bonds Series
C/(MBIA Insurance) (Aaa AAA)
6.75%, 06/01/17 500 529
Fresno, California Health
Facility Revenue Bonds (Holy
Cross Health System - St.
Agnes Medical Center) (A1 AA-)
6.50%, 06/01/11 550 568
</TABLE>
93
<PAGE> 94
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Loma Linda, California Hospital
Revenue Refunding Bonds (Loma
Linda University Medical
Center) Series C/(MBIA
Insurance) (Aaa AAA)
5.375%, 12/01/22 $3,000 $2,719
Los Angeles County, California
Metropolitan Transit Authority
Sales Tax Revenue Bond (C 2nd)
Series A/(AMBAC Insurance)
(Aaa AAA)
5.50%, 07/01/17 3,000 2,824
Los Angeles County, California
Public Works Financing
Authority Lease Revenue Bonds
(Multi Capital Facilities
Project IV)/(MBIA Insurance)
(Aaa AAA)
5.00%, 12/01/07 2,000 1,940
Los Angeles County, California
Transportation Commission
Sales Tax Revenue Refunding
Bonds Series B (A1 A+)
6.50%, 07/01/13 555 574
Los Angeles, California
Department of Airports Revenue
Bonds Series A/(FGIC
Insurance) (Aaa AAA)
5.50%, 05/15/09 3,000 2,993
5.50%, 05/15/10 560 553
Los Angeles, California
Department of Water and Power
Electric Plant Revenue Bonds
(Aa AA-)
6.00%, 01/15/11 865 876
Los Angeles, California Harbor
Revenue Bonds Series A (Aa AA)
6.50%, 08/01/25 3,000 3,128
Los Angeles, California
Wastewater System Revenue
Bonds Series B/(AMBAC
Insurance) (Aaa AAA)
6.25%, 06/01/12 1,260 1,292
Northern California Power
Agency Multiple Capital
Facilities Revenue Bonds
Series A/(MBIA Insurance)
(Aaa AAA)
6.50%, 08/01/12 3,300 3,465
Oceanside, California
Certificates of Participation
Refunding Bonds Series A
(A BBB+)
6.375%, 04/01/12 1,250 1,247
Orange County, California Water
District Certificates of
Participation (Aa AA)
6.50%, 08/15/11 1,150 1,169
Petaluma, California
Certificates of Participation
Series A/(AMBAC Insurance)
(Aaa AAA)
5.50%, 08/01/08 750 754
Sacramento, California
Certificates of Participation
(Light Rail Transportation
Project) (A1 A+)
6.75%, 07/01/07 2,000 2,195
Sacramento, California Regional
Transit District Certificates
of Participation Series 1992A
(A1 -)
6.375%, 03/01/05 250 267
San Bernardino County,
California Certificates of
Participation (Medical Center
Financing Project) Series A/
(MBIA Insurance)
(Aaa AAA)
5.50%, 08/01/22 5,500 5,081
San Bernardino County,
California Certificates of
Participation (West Valley
Detention Center)/(MBIA
Insurance) (Aaa AAA)
6.50%, 11/01/12 420 441
San Francisco, California Bay
Area Rapid Transit District
Sales Tax Revenue Bonds/(FGIC
Insurance) (Aaa AAA)
5.50%, 07/01/15 2,725 2,589
San Francisco, California
City and County
(Library Facilities Project)
Series D (A1 AA-)
5.75%, 06/15/12 685 679
San Francisco, California Port
Commission Revenue Refunding
Bonds (A BBB+)
5.90%, 07/01/09 5,000 4,838
Santa Clara County, California
Financing Authority Lease
Revenue Bonds (VMC Facility
Replacement Project) Series A/
(AMBAC Insurance) (Aaa AAA)
7.75%, 11/15/10 1,460 1,781
6.875%, 11/15/14 2,000 2,178
Santa Clara, California
Redevelopment Agency Tax
Allocation Revenue Refunding
Bonds (Bayshore North
Project)/(AMBAC Insurance)
(Aaa AAA)
7.00%, 07/01/10 1,500 1,712
Southern California Public
Power Authority Revenue Bonds
(San Juan Unit 3) Series A/
(MBIA Insurance) (Aaa AAA)
5.375%, 01/01/08 5,000 4,975
Southern California Rapid
Transit District Revenue
Bonds/(AMBAC Insurance)
(Aaa AAA)
6.00%, 09/01/08 3,500 3,640
</TABLE>
94
<PAGE> 95
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Temecula, California Community
Services District Certificates
of Participation (Community
Recreation Center Project)
(- A)
7.125%, 10/01/12 $1,000 $ 1,046
Westminster, California Public
Financing Authority Bonds
Certificates of Participation
(1994 Civic Center and Street
Improvement Project) (- A-)
7.00%, 06/01/19 3,325 3,341
-------
TOTAL MUNICIPAL BONDS
(Cost $86,103)
87,677
-------
Shares
------
SHORT-TERM INVESTMENTS--0.0%(c)
Provident Institutional Funds -
California Money Fund
Portfolio
3.32%, 09/07/95 14 $ 14
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $14)
14
-------
TOTAL INVESTMENTS--100.0%
(Cost $87,017) $88,591
=======
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS.
Parenthetical disclosures which follow each security represent independent
bond ratings, where available, as provided by Moody Investor Services, Inc.
and Standard & Poor's Corporation, which were in effect at August 31, 1995.
These ratings are unaudited.
(a) Variable rate securities. Interest rates vary periodically based on
current market rates. Rates shown are the effective rates on August 31,
1995. Dates shown represent the latter of the demand date or next
interest rate change date, which is considered the maturity date for
financial reporting purposes. For variable rate securities without
demand features and which mature in less than one year, the next
interest reset date is shown.
(b) Interest rates represent coupon rate of security.
(c) Interest rates represent the yield on August 31, 1995.
<TABLE>
<CAPTION>
Abbreviations
-------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
95
<PAGE> 96
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
----------------- -----------------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $39,852 and $87,017,
respectively) $40,178 $88,591
Interest receivable 458 1,244
Receivable for fund shares sold 93 463
Deferred organization costs 3 4
Prepaid expenses 2 2
------- -------
Total assets 40,734 90,304
------- -------
LIABILITIES
Payable for:
Dividends 28 79
Fund shares redeemed 20 113
Investment advisory and
administration fee 11 23
Transfer agency and
shareholder service fees 2 3
Other 34 41
------- -------
Total liabilities 95 259
------- -------
Net assets applicable to outstanding
shares $40,639 $90,045
======= =======
NET ASSETS CONSIST OF:
Capital paid in $41,138 $91,162
Accumulated undistributed
net investment income 11 36
Accumulated net realized loss on
investments sold (836) (2,727)
Net unrealized appreciation on
investments 326 1,574
------- -------
$40,639 $90,045
======= =======
THE PRICING OF SHARES
Outstanding shares, $0.00001 par
value
(unlimited shares authorized) 4,040 8,554
Net asset value, offering and
redemption price per share $10.06 $10.53
</TABLE>
See accompanying Notes to Financial Statements.
96
<PAGE> 97
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
----------------- -----------------
<S> <C> <C>
Interest income $ 1,999 $ 5,607
--------- ---------
Expenses:
Investment advisory and
administration fee 171 375
Transfer agency and
shareholder service fees 104 229
Custodian fees 31 63
Professional fees 19 31
Shareholder reports 9 19
Trustees' fees 3 6
Amortization of deferred organization
costs 1 1
Insurance and other expenses 12 17
--------- ---------
350 741
Less expenses reduced (142) (208)
--------- ---------
Total expenses incurred by Fund 208 533
--------- ---------
Net investment income 1,791 5,074
--------- ---------
Net realized gain (loss) on
investments:
Proceeds from sales of investments 65,090 128,612
Cost of investments sold (65,857) (130,492)
--------- ---------
Net realized loss on investments
sold (767) (1,880)
--------- ---------
Change in net unrealized appreciation
(depreciation) on investments:
Beginning of period (893) (512)
End of period 326 1,574
--------- ---------
Increase in net unrealized
appreciation on investments 1,219 2,086
--------- ---------
Increase in net assets resulting from
operations $ 2,243 $ 5,280
========= =========
</TABLE>
See accompanying Notes to Financial Statements.
97
<PAGE> 98
SchwabFunds(R) 8
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SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------- --------------------
For the year ended August 31,
1995 1994 1995 1994
------- ------- ------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,791 $ 1,931 $ 5,074 $ 6,215
Net realized loss on investments
sold (767) (69) (1,880) (403)
Increase (decrease) in net
unrealized appreciation
(depreciation) on investments 1,219 (1,387) 2,086 (7,834)
------- ------- ------- --------
Increase (decrease) in net
assets resulting from operations 2,243 475 5,280 (2,022)
------- ------- ------- --------
Distributions to shareholders
from:
Net investment income (1,786) (1,928) (5,061) (6,205)
Capital gains -- -- -- (1,427)
------- ------- ------- --------
Total distributions to
shareholders (1,786) (1,928) (5,061) (7,632)
------- ------- ------- --------
Capital Share Transactions:
Proceeds from shares sold 12,494 40,720 22,400 39,322
Net asset value of shares issued
in reinvestment of dividends 1,403 1,525 3,479 5,578
Less payments for shares
redeemed (22,364) (36,688) (42,485) (66,881)
------- ------- ------- --------
Increase (decrease) in net
assets from capital share
transactions (8,467) 5,557 (16,606) (21,981)
Total increase (decrease) in net
assets (8,010) 4,104 (16,387) (31,635)
Net Assets:
Beginning of period 48,649 44,545 106,432 138,067
------- ------- ------- --------
End of period (including
undistributed net investment
income of $11, $6, $36 and
$23 respectively) $40,639 $48,649 $90,045 $106,432
======= ======= ======= ========
Number of Fund Shares:
Sold 1,271 4,035 2,201 3,601
Reinvested 143 152 342 512
Redeemed (2,293) (3,664) (4,220) (6,147)
------- ------- ------- --------
Net increase (decrease) in
shares outstanding (879) 523 (1,677) (2,034)
Shares Outstanding:
Beginning of period 4,919 4,396 10,231 12,265
------- ------- ------- --------
End of period 4,040 4,919 8,554 10,231
======= ======= ======= ========
</TABLE>
See accompanying Notes to Financial Statements.
98
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SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUNDS
The Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab
California Long-Term Tax-Free Bond Fund (the "Funds"), are series of Schwab
Investments (the "Trust"), an open-end, management investment company organized
as a Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the two funds described above, the Trust also offers -- the
Schwab 1000 Fund(R), the Schwab Short/Intermediate Government Bond Fund, the
Schwab Long-Term Government Bond Fund, the Schwab Short/Intermediate Tax-Free
Bond Fund and the Schwab Long-Term Tax-Free Bond Fund. The assets of each series
are segregated and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income that is exempt from federal income and State of California
personal income taxes, consistent with preservation of capital. The Funds, which
are not "diversified" within the meaning of the Investment Company Act of 1940,
as amended, each invest in a portfolio of debt obligations issued by or on
behalf of the State of California, its political subdivisions, agencies or
instrumentalities.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the representative quoted bid and asked prices, or if such prices
are not available, at prices for securities of comparable maturity, quality and
type. Short term securities within 60 days or less of maturity are stated at
amortized cost which approximates market value.
Security transactions and interest income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Interest income is recorded on the
accrual basis and includes amortization of premium on investments. Realized
gains and losses from security transactions are determined on an identified cost
basis. For callable bonds purchased at a premium, the excess of the purchase
price over the call value is amortized against interest income through the call
date. If the call provision is not exercised, any remaining premium is amortized
through the final maturity date.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains are recorded on ex-dividend date, payable annually on a calendar year
basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, their initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
99
<PAGE> 100
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
All distributions paid by the Schwab California Short/Intermediate Tax-Free Bond
Fund and the Schwab California Long-Term Tax-Free Bond Fund during the year
ended August 31, 1995 qualify as exempt-interest dividends for federal tax
purposes.
At August 31, 1995, (for financial reporting and federal income tax purposes),
net unrealized appreciation for the Schwab California Short/Intermediate
Tax-Free Bond Fund aggregated $326,000, of which $513,000 related to appreciated
securities and $187,000 related to depreciated securities, and net unrealized
appreciation for the Schwab California Long-Term Tax-Free Bond Fund aggregated
$1,574,000, of which $2,316,000 related to appreciated securities and $742,000
related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of .41% of each Fund's
average daily net assets. Under this agreement, the Schwab California
Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-
Free Bond Fund incurred investment advisory and administration fees of $171,000
and $375,000, respectively, during the year ended August 31, 1995, before the
Investment Manager reduced its fee (see Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets of each Fund
for transfer agency services and .20% of such assets for shareholder services.
For the year ended August 31, 1995, the Schwab California Short/Intermediate
Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund
incurred transfer agency and shareholder service fees of $104,000, and $229,000,
respectively, before Schwab reduced its fees (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers or directors of the Investment Manager and Schwab. During the year
ended August 31, 1995, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Schwab California Short/Intermediate
Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund
incurred fees aggregating $9,000 related to the Trust's unaffiliated trustees.
100
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SchwabFunds(R) 11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
During the year ended August 31, 1995, the Investment Manager and Schwab reduced
a portion of their fees in order to limit each Fund's ratio of operating
expenses to average net assets. The total of such fee reductions by the
Investment Manager were $94,000 and $130,000 for the Schwab California
Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term
Tax-Free Bond Fund, respectively, and the total of such fee reductions by Schwab
were $48,000 and $78,000 for the Schwab California Short/Intermediate Tax-Free
Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1995, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------- -------------------
<S> <C> <C>
Purchases $25,133 $41,470
Proceeds of sales and maturities $31,309 $53,564
</TABLE>
101
<PAGE> 102
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1995
- --------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab California
Short/Intermediate Tax-Free Bond Fund
-------------------------------------------------
For the period
April 21, 1993
(commencement
For the year ended of operations) to
August 31, August 31,
1995 1994 1993
------------ ------------ -----------------
<S> <C> <C> <C>
Net asset value at beginning of period $ 9.89 $ 10.13 $ 10.00
Income from Investment Operations
- ---------------------------------
Net investment income .42 .37 .13
Net realized and unrealized gain (loss) on investments .17 (.24) .13
-------- -------- -------
Total from investment operations .59 .13 .26
Less Distributions
- ------------------
Dividends from net investment income (.42) (.37) (.13)
Distributions from realized gain on investments -- -- --
-------- -------- -------
Total distributions (.42) (.37) (.13)
-------- -------- -------
Net asset value at end of period $ 10.06 $ 9.89 $ 10.13
======== ======== =======
Total return (%) 6.17 1.29 2.57
- ----------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (000s) $40,639 $48,649 $44,545
Ratio of expenses to average net assets (%) .50 .48 .45*
Ratio of net investment income to average net assets (%) 4.29 3.69 3.49*
Portfolio turnover rate (%) 62 35 0
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab California
Short/Intermediate Tax-Free Bond Fund for the periods ended August 31, 1995,
1994 and 1993 would have been .84%, .86% and 1.25%*, respectively, and the ratio
of net investment income to average net assets would have been 3.95%, 3.31% and
2.69%*, respectively.
* Annualized
102
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SchwabFunds(R) 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California
Long-Term Tax-Free Bond Fund
-----------------------------------------------------------
For the period
For the February 24, 1992
eight (commencement
For the year ended months ended of operations) to
August 31, August 31, December 31,
1995 1994 1993 1992
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.40 $ 11.26 $ 10.58 $ 10.00
Income from Investment Operations
- ---------------------------------
Net investment income .56 .56 .38 .51
Net realized and unrealized gain (loss) on
investments .13 (.74) .68 .58
-------- -------- -------- -------
Total from investment operations .69 (.18) 1.06 1.09
Less Distributions
- ------------------
Dividends from net investment income (.56) (.56) (.38) (.51)
Distributions from realized gain on
investments -- (.12) -- --
-------- -------- -------- -------
Total distributions (.56) (.68) (.38) (.51)
-------- -------- -------- -------
Net asset value at end of period $ 10.53 $ 10.40 $ 11.26 $ 10.58
======== ======== ======== =======
Total return (%) 6.98 (1.70) 10.13 11.10
- ----------------
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (000s) $90,045 $106,432 $138,067 $72,969
Ratio of expenses to average net assets (%) .58 .60 .60* .45*
Ratio of net investment income
to average net assets (%) 5.54 5.12 5.18* 5.72*
Portfolio turnover rate (%) 46 48 47 124
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab California
Long-Term Tax-Free Bond Fund for the periods ended August 31, 1995, 1994, 1993
and December 31, 1992 would have been .81%, .80%, .87%* and 1.05%*,
respectively, and the ratio of net investment income to average net assets would
have been 5.31%, 4.92%, 4.91%* and 5.12%*, respectively.
* Annualized
103
<PAGE> 104
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Trustees
and Shareholders of the Schwab California Short/Intermediate Tax-Free Bond Fund
and the Schwab California Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets present fairly, in all material respects, the financial
position of the Schwab California Short/Intermediate Tax-Free Bond Fund and the
Schwab California Long-Term Tax-Free Bond Fund (two series constituting part of
Schwab Investments, hereafter referred to as the "Trust") at August 31, 1995,
and the results of their operations and the changes in their net assets for the
periods presented, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1995 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 29, 1995
104
