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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB INVESTMENTS
101 Montgomery Street, San Francisco, CA 94104
DECEMBER 30, 1994,
AS AMENDED JUNE 30, 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 30, 1994, as amended June 30, 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 contact Charles
Schwab & Co., Inc. ("Schwab") at 800-2 NO-LOAD, 24 hours a day or 101
Montgomery Street, San Francisco, CA 94104.
SCHWABFunds(R)
800-2 NO-LOAD
TABLE OF CONTENTS
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INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PORTFOLIO TRANSACTIONS AND TURNOVER . . . . . . . . . . . . . . . . . . . . 24
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SHARE PRICE CALCULATION . . . . . . . . . . . . . . . . . . . . . . . . . . 31
TOTAL RETURN AND YIELD . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SCHWABFUNDS INVESTMENT STRATEGIES . . . . . . . . . . . . . . . . . . . . . 34
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . 41
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
APPENDIX - RATINGS OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . 96
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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.
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.
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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 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.
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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 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
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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 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
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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."
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
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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" (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
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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 General
Fund will be distributed in the future to them is unclear.
Overview. Since 1990, the State has faced 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 have been the worst of any post-war
recession.
The recession has both 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 1991-92. Revenue expenditures essentially equalled in
1992-93. 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
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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 appropriation
limit.
1994-95 FISCAL YEAR
Revenues. The Governor's 1994-1995 Budget projects General Fund
revenues and transfers in 1994-1995 of $41.3 billion, or about $1.4 billion
more than 1993-1994, as revised. This projection includes the receipt of
approximately $2 billion in new Federal aid to reimburse the State for certain
costs related to undocumented foreign immigrants, the receipt of $600 million
based on the assumption that the State will prevail in certain U.S. Supreme
Court litigation, the transfer of 0.5 percent of the State sales tax to the
counties, and tax relief of about $95 million proposed by the Governor for low
and moderate income taxpayers. The Governor's 1994-1995 Budget also projects
Special Fund revenues of $13.7 billion, an increase of 9.6 percent over
1993-1994.
Expenditures. The Governor's 1994-1995 Budget projects General Fund
expenditures of $38.8 billion (a 1.3 percent decrease from projected 1993-1994
expenditures of $39.3 billion), in order to keep a balanced budget which pays
off the accumulated deficit, within available revenues. The Governor's
1994-1995 Budget also projects Special Fund expenditures of $13.7 billion, a
5.4 percent increase over 1993-1994. The Governor balanced 1994-1995 Budget
with a number of major adjustments, including the receipt of about $1.1 billion
from the Federal government for health and welfare costs (although President
Clinton's 1995 budget does not contain any additional funds for the State for
immigrant-related costs or health and welfare costs), reductions in health and
welfare programs of about $800 million, the transfer to the counties of about
$3.3 billion of health and welfare programs, and an increase of about $2
billion in Proposition 98 General Fund support for K-14 schools (with a
re-transfer to the counties from school districts of $1.1 billion of property
tax revenue).
The Governor's 1994-1995 Budget contains the most significant
restructuring of the relationship between the State and its counties since
1978. The plan is a $5.4 billion transaction constructed with existing revenue
sources, but fiscally neutral which would primarily affect counties, with a
minor benefit for cities. The plan increases the counties' share of the State
sales tax, transfer some property tax revenue from schools to counties, and
increase other county revenues; the State would assume a greater share of
trial court costs. With these additional resources, the counties assume a
greater share of costs for certain health and welfare programs (including
Medi-Cal) and full responsibility for other programs.
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 Governor's 1994-1995 Budget continues to predict that
population growth in the 1990's will keep pressure on major State programs,
outstripping projected revenue growth in an economy that is slowly emerging
from a deep recession. The Budget is tied to a $7 billion, two-year package
that would require the State to
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cut spending if California is unable to stay within pre-set spending limits.
The foregoing discussion of the 1994-1995 Budget is based upon the
Governor's Budget for that year, 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 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 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 to Article XIII A 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. Several recent decisions of the California
Courts of Appeal have held parts of Proposition 62 unconstitutional, however.
Propositions 98 and 111. These initiatives changed the State
appropriations limit and State funding of public education below the university
level and 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.
Appropriation Limit. Local governmental entities are also subject to
annual appropriations limits. A local government's revenues in any year exceed
the amount permitted to be spent, the excess must have to be returned to the
public through a revision of tax rates or fee schedules over the following two
years. The State, in response to the significant reduction in local property
tax revenues as a result of the passage of Proposition 13, enacted legislation
to provide local government with increased expenditures from the General Fund.
The redistribution of property tax revenues in Fiscal 1992-93 ended this
post-Proposition 13 fiscal relief.
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
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particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected).
ADDITIONAL ISSUES
Mortgages and Deeds of Trust. The Fund 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, Inc. ("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. 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.
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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, index participations, and index participation
contracts subject to the limitation that the value of securities represented by
these contracts and participations will not exceed 20% of its assets.
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 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
12
<PAGE> 13
representation equalling 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 or cash equivalents 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 require that all of their futures transactions
constitute bona fide hedging transactions. Accordingly, a Fund will only 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. As evidence of
this hedging intent, each Fund expects that approximately 75% of its futures
contract purchases will be "completed," that is, equivalent amounts of related
securities will have been, or will be in the process of being, purchased by the
Fund upon sale of open futures contracts.
A Fund will not enter into futures contract transactions if doing so
would result in the sum of its initial margin deposits on open contracts
exceeding 5% of the market value of the Fund's total 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, because
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.
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 s 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
13
<PAGE> 14
"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 Taxes."
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
14
<PAGE> 15
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.
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-
15
<PAGE> 16
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:
1) 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.
2) 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.
3) 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.
4) 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.
5) 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.
6) Make short sales, except for short sales against the box.
16
<PAGE> 17
7) 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.
8) Purchase securities on margin, except such short-term credits
as may be necessary for the clearance of purchases and sales
of securities.
9) 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.
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 THE TRUST PRINCIPAL OCCUPATION
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Founder, Chairman, Chief Executive Officer and
Age: 57 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 and 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).
ELIZABETH G. SAWI ** President and Trustee Executive Vice President - Mutual Funds, Charles Age: 43
Schwab & Co., Inc. and The Charles Schwab
Corporation; President, Charles Schwab
Investment Management, Inc. Prior to
April 1994, Ms. Sawi was Executive Vice President -
Marketing and Advertising for Charles Schwab & Co., Inc.
and The Charles Schwab Corporation.
</TABLE>
__________________________________
*Mr. Schwab is an "interested person" of the Trust.
**Ms. Sawi is an "interested person" of the Trust.
17
<PAGE> 18
<TABLE>
<CAPTION>
POSITION WITH
NAME THE TRUST PRINCIPAL OCCUPATION
<S> <C> <C>
DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
Age: 63 Associates (advertising and marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
Age: 63 Semloh Financial, Inc. (international financial
services).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (real
Age: 56 estate investment). Prior to 1993, Mr. Stephens
was Chairman and Chief Executive Officer of the
Bank of San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
Age: 51 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
Age: 49 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 Financia Officer, The Charles Schwab
Trust Company.
WILLIAM J. KLIPP*** Senior Vice President, Senior Vice President, Charles Schwab & Co.,
Age: 39 Chief Operating Officer Inc. 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, Charles Schwab Investment
Age: 39 Chief Investment Management, Inc. Prior to 1991, Mr. Ward was
Officer Vice President and Portfolio Manager for federated Investors.
FRANCES COLE Secretary Chief Counsel and Compliance Officer, Assistant
Age: 39 Corporate Secretary, Charles Schwab Investment Management, Inc.
Prior to 1991, Ms. Cole was Senior Counsel for Equitec
Securities Company.
TIMOTHY B. PAWLOSKI Assistant Treasurer Vice President of Finance- SchwabFunds(R), 1991
Age: 36 to 1993, Mr. Pawloski was Director of Finance for
Charles Schwab & Co., Inc. and from 1987 to 1991,
he served as a Senior Manager at Price Waterhouse.
</TABLE>
__________________________________
***Mr. Klipp is an "interested person" of the Trust.
18
<PAGE> 19
<TABLE>
POSITION WITH
NAME THE TRUST PRINCIPAL OCCUPATION
<S> <C> <C>
PAMELA E. HERLICH Assistant Secretary Assistant Corporate Secretary, The Charles
Age: 41 Schwab Corporation and Charles Schwab & Co.,
Inc.; Corporate Secretary, Charles Schwab
Investment Management, Inc., Mayer & Schweitzer and
The Charles Schwab Trust Company. Prior to 1993,
Ms. Herlich was Assistant Corporate Secretary for Mayer
& Schweitzer, Inc. and The Charles Schwab Trust Company.
DAVID H. LUI Assistant Secretary Senior Counsel - Charles Schwab Investment
Age: 34 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 for Thelen, Marrin, Johnson & Bridges (a
San Francisco law firm).
CHRISTINA M. PERRINO Assistant Secretary Senior Counsel - Charles Schwab Investment
Age: 34 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
Benefits Accrued Estimated Annual
Aggregate as Part of Fund Benefits Upon
Name of Person Compensation Expenses from the Retirement from Total Compensation
Position from the Trust Fund Complex(2) the Fund Complex(2) from the Fund Complex(2)
<S> <C> <C> <C> <C>
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Elizabeth G. Sawi, 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 58,000
Robert G. Holmes, 16,000 N/A N/A 58,000
Donald R. Stephens, 16,000 N/A N/A 58,000
Trustee
Michael W. Wilsey, 16,000 N/A N/A 58,000
</TABLE>
1. Figures are for the Trust's fiscal year ended August 31, 1994.
2. "Fund Complex" comprises all 19 funds of the Trust, The
Charles Schwab Family of Funds, Schwab Capital Trust, and
Schwab Annuity Portfolios.
___________________________________________
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(R) or SchwabFunds 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
20
<PAGE> 21
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."
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 18 mutual funds
with over $27 billion in assets as June 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
21
<PAGE> 22
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, 1991, 1992, the
period ended August 31, 1993, and the year ended 1994, the investment advisory
fees incurred by the Schwab 1000 Fund were $0 (fees were reduced by $238,016),
$557,474 (fees were reduced by $240,228), $795,135 (fees were reduced by
$109,899), and $1,554,672, respectively.
The Government Bond Funds. During the period from March 5, 1993
(commencement of operations) through August 31, 1993 and the year ended 1994,
the investment advisory fees incurred by the Schwab Long-Term Government Bond
Fund were $198 (fees were reduced by $1,810) and $18,943 (fees were reduced by
$18,943), respectively.
During the period from November 5, 1991 (commencement of operations)
to December 31, 1991, 1992, the period ended August 31, 1993, and the year
ended 1994, the investment advisory fees incurred by the Schwab
Short/Intermediate Government Bond Fund were $0 (fees were reduced by $19,591),
$155,699 (fees were reduced by $525,328), $442,719 (fees were reduced by
$255,414), and $993,325 (fees were reduced by $363,412), 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 year ended 1994, 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), and $195,391 (fees were reduced by
$116,810), respectively.
During the period from April 21, 1993 (commencement of operations)
through August 31, 1993 and the year ended 1994, the investment advisory fees
incurred by the Schwab Short/Intermediate Tax-Free Bond Fund were $4,743 (fees
were reduced by $61,069) and $274,936 (fees were reduced by $182,991),
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 year ended 1994, 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), and $497,886 (fees
were reduced by $182,153), respectively. During the fiscal period from April 21,
1993 (commencement of operations) through August 31, 1993 and the year ended
1994, the investment advisory fees incurred by the Schwab California
Short/Intermediate Tax-Free Bond Fund were $3,481 (fees were reduced by $44,520)
and $214,365 (fees were reduced by $139,229), 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
22
<PAGE> 23
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 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 no fees during the year ended
December 31, 1991; $213,232 during the year ended December 31, 1992; $301,795
for the period ended August 31, 1993; and $504,966 for the year ended August
31, 1994.
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.
23
<PAGE> 24
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 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, 1001 Pennsylvania Avenue, N.W., Suite 1200 South,
Washington, D.C. 20004, 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
24
<PAGE> 25
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.
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 designed 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,
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<PAGE> 26
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 year ended 1994, the Schwab 1000 Fund paid brokerage
commissions of $120,199 and $50,000, respectively. Of these amounts, $111,528
(92.8% of the total amount) and $42,000 (84% of the total amount) were paid to
Schwab, an affiliated person of the Fund in 1993 and 1994, respectively. The
Government Bond Funds, Municipal Bond Funds and California Municipal Bond Funds
paid no 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 rate was
1% for the year ended December 31, 1992, and the period ended August 31, 1993,
and 3% for the year ended August 31, 1994.
The Government Bond Funds. The portfolio turnover rate for the Schwab
Long-Term Government Bond Fund for the period March 5, 1993 (commencement of
operations) to August 31, 1993 and for the year ended August 31, 1994 were 42%
and 123%, respectively. The significant variation in the Schwab Long-Term
Government Bond Fund's portfolio turnover rate for the periods cited is the
result of the first period comprising less than a full year's operations (so
relatively less portfolio trading activity occurred in comparison to that
occurring during a full year of operations). The portfolio turnover rates for
the Schwab Short/Intermediate Government Bond Fund for the year ended December
31, 1992, for the period ended August 31, 1993, and the year ended 1994 were
185%, 107%, and 91%, respectively.
The Municipal Bond Funds. The portfolio turnover rates for the Schwab
26
<PAGE> 27
Long-Term Tax-Free Bond Fund from September 11, 1992 (commencement of
operations) through December 31, 1992, for the period ended August 31, 1993,
and the year ended 1994 were 54%, 91%, and 62%, respectively. The portfolio
turnover rate for the Schwab Short/Intermediate Tax-Free Bond Fund for the
period from April 21, 1993 (commencement of operations) to August 31, 1993 and
the year ended 1994 were 11% and 19%, respectively.
The California Municipal Bond Funds. The portfolio turnover rates
for the Schwab California Long-Term Tax-Free Bond Fund from February 24, 1992
(commencement of operations) to December 31, 1992, for the period ended August
31, 1993, and the year ended 1994 were 124%, 47%, and 48%, respectively. The
significant variation in the Schwab California Long-Term Tax-Free Bond Fund's
portfolio turnover rate for the periods cited is the result of a decrease in new
issue volume in the municipal market. The portfolio turnover rate for the
Schwab California Short/Intermediate Tax-Free Bond Fund for the period April 21,
1993 (commencement of operations) to August 31, 1993 and the year ended 1994
were 0% and 35%, respectively.
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 capital gain net income for the one-year period ending on October 31 of
such calendar year. The balance of such income must be distributed during the
next calendar year. For the foregoing purposes, a Fund is treated as having
distributed any amount on which it is subject to
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<PAGE> 28
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 is 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 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.
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<PAGE> 29
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
Funds 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 the California Municipal Bond Funds
fail to so qualify, no part of their dividends will be exempt from State of
California personal income tax.
Not later than 60 days after the close of its taxable year, the
California Municipal Bond Funds 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 the California Municipal Bond
Funds to all of their shareholders with respect to any taxable year cannot
exceed the amount of interest received by each 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 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
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<PAGE> 30
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 the California Municipal Bond Funds are 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 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 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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<PAGE> 31
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 year commencement of operations to
ended August 31, 1994 August 31, 1994
---------------------- ---------------------------------
<S> <C> <C>
Schwab 1000 Fund(R) 4.28% 10.27%
Schwab Long-Term Government Bond Fund -5.80% 1.55%
Schwab Short/Intermediate Government -1.67% 5.48%
Bond Fund
Schwab Long-Term Tax-Free Bond Fund -0.42% 5.48%
Schwab Short/Intermediate Tax-Free Bond 1.42% 3.13%
Fund
Schwab California Long-Term Tax-Free -1.70% 7.59%
Bond Fund
Schwab California Short/Intermediate 1.29% 2.84%
Tax-Free Bond Fund
</TABLE>
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<PAGE> 32
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, 1994
---- -----------------------------------
<S> <C>
Schwab Long-Term Government Bond Fund 7.35%
Schwab Short/Intermediate Government Bond Fund 5.71%
Schwab Long-Term Tax-Free Bond Fund 5.30%
Schwab Short/Intermediate Tax-Free Bond Fund 3.90%
Schwab California Long-Term Tax-Free Bond Fund 5.54%
Schwab California Short/Intermediate Tax-Free Bond Fund 4.10%
</TABLE>
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
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<PAGE> 33
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>
Tax equivalent yield for
30-day period ended August
Fund 31, 1994
---- --------------------------
<S> <C>
Schwab Long-Term Tax-Free Bond Fund 8.77%
Schwab Short/Intermediate Tax-Free Bond Fund 6.46%
Schwab California Long-Term Tax-Free Bond Fund 10.31%
Schwab California Short/Intermediate Tax-Free Bond Fund 7.63%
</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) beginning in 1993 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 $114,700 (for joint returns) or $57,350 (for separate
returns) for 1995. Actual tax equivalent yields and tax equivalent effective
yields may be higher for taxpayers subject to the loss of
33
<PAGE> 34
these benefits than the rates reported by the Funds.
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
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<PAGE> 35
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. The stocks included in these indices
represent approximately 18% and 86%, 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 91% of the total market capitalization
of all U.S. companies, 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.
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<PAGE> 36
The Schwab 1000 Fund is managed to offset capital gains with capital
losses in order to minimize the Fund's capital gains tax liability. 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 your shares and defer payment
of capital gains taxes until you redeem your shares. A shareholder's current
tax liability for capital gains should be reduced and the shareholder's total
return increased by these policies.
<R/>
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.
36
<PAGE> 37
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.
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<PAGE> 38
A chart appears here with a graphic display of the cumulative returns of (a)
Schwab 1000 Index; (b) S&P 500 Index; (c) 3-Month CDs; (d) Corporate Bonds; (e)
Treasury Bills; and (f) Inflation (CPI) between Dec. 1978 and Dec. 1993.
<TABLE>
<CAPTION>
Schwab 1000 S&P 500 3-Month Corporate Treasury Inflation
Year Index Index CDs Bonds Bills (CPI)
<S> <C> <C> <C> <C> <C> <C>
Dec 1978 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Dec 1979 21.34% 18.44% 15.60% -4.18% 10.38% 13.31%
Dec 1980 61.20% 56.84% 31.20% -6.82% 22.78% 27.35%
Dec 1981 54.95% 49.14% 46.80% -7.97% 40.84% 38.74%
Dec 1982 87.60% 81.07% 62.40% 31.19% 55.69% 44.11%
Dec 1983 128.48% 121.83% 78.33% 39.41% 69.38% 49.58%
Dec 1984 142.83% 135.73% 97.59% 62.91% 86.07% 55.49%
Dec 1985 221.19% 211.54% 114.17% 111.93% 100.44% 61.36%
Dec 1986 277.88% 269.08% 128.62% 153.99% 112.79% 63.18%
Dec 1987 289.34% 288.39% 144.67% 153.31% 124.42% 70.38%
Dec 1988 355.39% 353.68% 163.93% 180.43% 138.66% 77.91%
Dec 1989 492.10% 496.54% 190.95% 225.95% 158.64% 86.17%
Dec 1990 465.16% 477.62% 215.62% 248.05% 178.85% 97.54%
Dec 1991 656.08% 654.07% 234.99% 317.28% 194.45% 103.60%
Dec 1992 723.39% 711.91% 247.78% 356.48% 204.78% 109.50%
Dec 1993 807.71% 793.02% 259.00% 416.66% 213.61% 111.58%
</TABLE>
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)
election or 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 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
38
<PAGE> 39
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.
Five Percent Ownership. Shares of each Fund must be purchased through
an account maintained at Schwab, therefore all shares of the Funds are held by
Schwab for the benefit of individual accounts. Following is a list of accounts
that as of December 15, 1994, held five percent or more of the shares of
beneficial interest of the Schwab Long-Term Government Bond Fund:
<TABLE>
<CAPTION>
Name/Address Percent Owned
- ----------------------------- -------------
<S> <C>
Paul J. Gilles TTEE 6.35%
Central Minnesota Anesthesia
Ltd.
1526 Northway Drive
Saint Cloud, Minnesota 56303
Stephen & Virginia Porter 5.64%
c/o Burns & Whitehead
100 Bush NBR 1100
San Francisco, California 94104
</TABLE>
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.
39
<PAGE> 40
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(TM)(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(5)
Schwab California Tax-Exempt Money Fund--Sweep Shares(3)
Schwab California Tax-Exempt Money Fund--Value Advantage Shares(3,5)
Schwab Retirement Money Fund(TM)(6)
Schwab Institutional Advantage Money Fund(TM)(6)
Schwab New York Tax-Exempt Money Fund--Sweep Shares(7)
Schwab New York Tax-Exempt Money Fund--Value Advantage Shares(5,7)
(1) The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of the Trust.
(2) The Schwab International Index Fund and the Schwab Small-Cap Index Fund
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) As of June 30, 1995, the Schwab Tax-Exempt Money Fund--Advantage Shares,
Schwab California Tax-Exempt Money Fund--Value Advantage Shares, and the
Schwab New York Tax-Exempt Money Fund--Value Advantage Shares had not yet
commenced operations.
(6) Designed for institutional investors only.
(7) Available only to New York residents and residents of selected other
states.
40
<PAGE> 41
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.
41
<PAGE> 42
1
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
COMMON STOCK--99.6%
ADC Telecommunications, Inc.* 3,600 $ 167
ADVANTA Corp. Class A 2,100 67
ADVANTA Corp. Class B 4,800 140
AES Corp.* 9,059 159
AFLAC 13,650 490
ALC Communications Corp.* 4,500 161
ALLTEL Corp. 24,700 689
AMBAC Inc. 4,600 187
AMP Inc. 14,000 1,017
AMR Corp.* 10,000 603
ARCO Chemical Co. 12,700 618
ASARCO Inc. 5,800 175
AST Research, Inc.* 1,400 25
AT&T Capital Corp. 5,900 137
AT&T Corp. 180,717 9,894
Abbott Laboratories 108,200 3,246
Adaptec, Inc.* 7,200 137
Adobe Systems Inc. 5,800 183
Advanced Micro Devices, Inc.* 11,700 339
Aetna Life & Casualty Co. 14,700 726
Ahmanson (H.F.) & Co. 14,900 333
Air Products & Chemicals, Inc. 15,200 756
Airborne Freight Corp. 2,500 76
Airgas, Inc.* 4,000 99
Airtouch Communications* 117,500 3,319
Albemarle Corp. 7,400 111
Albertson's, Inc. 33,800 976
Alco Standard Corp. 7,200 470
Alexander & Alexander
Services Inc. 5,300 109
Alexander & Baldwin, Inc. 5,500 139
Alleghany Corp.* 840 123
Allegheny Ludlum Corp. 8,600 184
Allegheny Power System, Inc. 15,800 356
Allergan, Inc. 8,700 238
Allied-Signal Inc. 38,000 1,420
Allmerica Property &
Casualty Companies, Inc. 8,700 145
Allstate Financial Corp. 57,900 1,505
Altera Corp.* 900 27
Alumax, Inc.* 5,500 168
Aluminum Co. of America 11,600 974
Alza Corp.* 10,400 244
AmSouth Bancorporation 7,300 242
Amdahl Corp.* 13,300 123
Amerada Hess Corp. 12,000 602
American Brands, Inc. 26,400 950
American Cyanamid Co. 11,800 1,139
American Electric Power
Co., Inc. 24,500 772
American Express Co. 66,100 1,859
American Freightways* 4,000 96
American General Corp. 28,500 851
American Greetings Corp.
Class A 9,000 270
American Home
Products Corp. 41,000 2,434
American International
Group, Inc. 42,350 3,981
American Medical
Holdings, Inc.* 10,400 252
American National
Insurance Co. 3,400 174
American Power
Conversion Corp.* 11,200 217
American Premier
Underwriters, Inc. 5,800 152
American President
Companies, Ltd. 700 18
American Re Corp.* 6,000 176
American Stores Co. 18,400 465
American Water Works
Co., Inc. 3,900 108
Ameritech Corp. 73,000 3,020
Amgen Inc.* 17,500 925
Amoco Corp. 66,300 3,837
Amphenol Corp. Class A* 5,300 109
Anadarko Petroleum Corp. 7,900 370
Analog Devices, Inc.* 6,800 219
Andrew Corp.* 3,400 165
Anheuser-Busch
Companies, Inc. 35,500 1,935
AnnTaylor Stores Corp.* 2,900 120
Aon Corp. 13,050 447
Apache Corp. 7,700 194
Apple Computer, Inc. 15,600 565
Applied Materials, Inc.* 11,000 558
Archer-Daniels-Midland Co. 46,132 1,188
Argonaut Group, Inc. 3,200 96
Armstrong World
Industries, Inc. 5,000 244
Arrow Electronics, Inc.* 3,700 142
Arvin Industries, Inc. 1,300 32
Ashland Oil, Inc. 7,800 295
Associated Communications
Corp. Class A* 2,400 62
Associated Communications
Corp. Class B* 2,400 62
Atlanta Gas Light Co. 3,000 98
Atlantic Energy, Inc. 6,400 112
Atlantic Richfield Co. 21,400 2,292
Atlantic Southeast
Airlines, Inc. 4,200 124
Atmel Corp.* 5,400 149
AutoZone, Inc.* 19,200 478
Autodesk, Inc. 2,900 177
Automatic Data
Processing, Inc. 18,900 1,023
Avery Dennison Corp. 7,200 248
Avnet, Inc. 5,500 204
Avon Products, Inc. 9,500 562
BB&T Financial Corp. 3,700 111
BHC Communications, Inc.
Class A* 3,300 250
BIC Corp. 3,000 90
BMC Software, Inc.* 3,400 147
Baker Hughes Inc. 18,600 349
Ball Corp. 3,700 103
Baltimore Gas & Electric Co. 19,150 440
Banc One Corp. 53,310 1,853
Bancorp Hawaii, Inc. 5,175 168
Bandag, Inc. 1,400 76
Bandag, Inc. Class A 1,800 90
Bank South Corp. 6,000 114
Bank of Boston Corp. 13,700 360
Bank of New York Co., Inc. 24,600 800
BankAmerica Corp. 47,395 2,340
Bankers Life Holding Corp. 6,900 153
</TABLE>
See accompanying Notes to Financial Statements.
42
<PAGE> 43
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Bankers Trust New York Corp. 10,900 $ 803
Banta Corp. 2,550 86
Bard (C.R.), Inc. 6,600 184
Barnes & Noble* 4,000 114
Barnett Banks, Inc. 12,488 590
Battle Mountain Gold Co. 10,200 111
Bausch & Lomb Inc. 7,900 309
Baxter International Inc. 36,100 1,024
BayBanks, Inc. 2,400 145
Bear Stearns Companies Inc. 15,570 284
Beckman Instruments, Inc. 3,400 99
Becton, Dickinson & Co. 9,400 403
Bed Bath & Beyond, Inc.* 4,000 118
Bell Atlantic Corp. 58,226 3,188
BellSouth Corp. 66,300 3,937
Belo (A.H.) Corp. Class A 2,500 123
Bemis Co., Inc. 6,400 157
Beneficial Corp. 6,600 284
Berkley (W.R.) Corp. 2,300 85
Berkshire Hathaway Inc.* 160 3,056
Best Buy Co., Inc.* 5,200 185
Bethlehem Steel Corp.* 14,900 343
Betz Laboratories, Inc. 3,500 165
Beverly Enterprises, Inc.* 11,400 155
Biogen, Inc.* 4,000 202
Biomet, Inc.* 15,300 173
Birmingham Steel Corp. 3,900 100
Black & Decker Corp. 10,600 245
Block (H&R), Inc. 14,200 621
Block Drug Co., Inc. Class A 1,846 57
Blockbuster Entertainment Corp. 33,900 877
Boatmen's Bancshares, Inc. 13,500 452
Bob Evans Farms, Inc. 5,100 108
Boeing Co. 45,200 2,057
Boise Cascade Corp. 4,600 132
Borden, Inc. 17,500 195
Boston Chicken, Inc.* 2,300 93
Boston Edison Co. 5,800 155
Boston Scientific Corp.* 12,300 204
Bowater Inc. 4,200 118
Boyd Gaming Corp.* 7,600 96
Breed Technologies, Inc.* 4,100 116
Briggs & Stratton Corp. 1,800 139
Brinker International, Inc.* 9,225 224
Bristol-Myers Squibb Co. 68,000 3,910
Brooklyn Union Gas Co. 6,350 158
Brown Group, Inc. 2,300 86
Brown-Forman Corp. Class B 9,000 271
Browning-Ferris Industries, Inc. 26,200 829
Brunswick Corp. 12,000 276
Burlington Coat Factory
Warehouse Corp.* 4,800 116
Burlington Industries, Inc.* 8,400 112
Burlington Northern Inc. 11,500 604
Burlington Resources Inc. 17,200 647
CBI Industries, Inc. 4,600 139
CBS Inc. 2,100 675
CIGNA Corp. 9,500 637
CIPSCO Inc. 4,100 112
CMS Energy Corp. 11,400 257
CNA Financial Corp.* 8,000 488
CPC International Inc. 19,700 1,054
CSX Corp. 13,900 1,074
CUC International Inc.* 14,750 505
Cabletron Systems, Inc.* 3,900 413
Cablevision Systems Corp.
Class A* 3,000 173
Cabot Corp. 4,600 130
Cadence Design Systems, Inc.* 5,500 90
Caesars World, Inc.* 3,000 139
Callaway Golf Co. 4,200 153
Campbell Soup Co. 33,500 1,298
Capital Cities/ABC, Inc. 21,000 1,761
Cardinal Health, Inc. 5,062 197
Caremark International, Inc. 8,975 218
Carolina Power & Light Co. 21,100 559
Carter-Wallace, Inc. 5,600 74
Caterpillar Inc. 13,400 1,548
Centerior Energy Corp. 18,100 181
Centex Corp. 4,100 109
Central & South West
Services Corp. 24,800 558
Central Fidelity Banks, Inc. 4,850 160
Central Newspapers, Inc.
Class A 3,100 84
Century Communications
Corp. Class A* 8,137 76
Century Telephone
Enterprises, Inc. 6,950 209
Ceridian Corp.* 6,200 166
Champion International Corp. 12,300 443
Charming Shoppes, Inc. 13,100 117
Chase Manhattan Corp. 24,500 925
Chemical Banking Corp. 33,230 1,288
Chemical Waste
Management, Inc.* 26,700 210
Chevron Corp. 87,000 3,687
Chicago & Northwest
Transportation Co.* 5,600 123
Chiron Corp.* 4,140 290
Chris-Craft Industries, Inc.* 3,324 122
Chrysler Corp. 47,000 2,262
Chubb Corp. 11,600 850
Cincinnati Bell Inc. 7,900 149
Cincinnati Financial Corp. 6,700 371
Cincinnati Gas & Electric Co. 8,400 189
Cincinnati Milacron Inc. 4,200 99
Cintas Corp. 5,800 185
Circuit City Stores, Inc. 12,000 285
Circus Circus Enterprises, Inc.* 11,200 274
Cirrus Logic, Inc.* 4,000 110
Cisco Systems, Inc.* 33,900 841
Citicorp 52,000 2,301
Citizens Corp. 4,200 73
Citizens Utilities Co. Class A* 17,836 252
Citizens Utilities Co. Class B* 7,616 109
Clark Equipment Co.* 2,200 155
Clayton Homes, Inc.* 7,250 157
Clear Channel
Communications, Inc.* 2,200 101
Clorox Co. 7,000 365
Coastal Corp. 13,400 410
Coca-Cola Co. 172,300 7,926
Coca-Cola Enterprises Inc. 17,500 315
Coleman Co., Inc.* 3,600 119
Colgate-Palmolive Co. 20,400 1,168
Coltec Industries Inc.* 8,900 167
Columbia Gas System, Inc.* 1,400 38
Columbia HCA Healthcare Corp. 45,140 1,918
Comcast Corp. Class A* 6,000 97
</TABLE>
See accompanying Notes to Financial Statements.
43
<PAGE> 44
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Comcast Corp. Special
Class A 26,700 $ 429
Comdisco, Inc. 4,815 105
Comerica Inc. 16,664 506
Commerce Bancshares, Inc. 4,400 144
Commonwealth Edison Co. 28,000 672
Compaq Computer Corp.* 33,600 1,256
Compass Bancshares, Inc. 4,850 120
Computer Associates
International, Inc. 21,700 871
Computer Sciences Corp.* 6,600 296
Compuware Corp.* 4,800 200
Comsat Corp. Series 1 5,500 138
ConAgra, Inc. 32,424 1,062
Conner Peripherals, Inc.* 6,600 79
Conrail, Inc. 10,300 567
Conseco, Inc. 4,000 207
Consolidated Edison Co.
of New York, Inc. 30,800 843
Consolidated Freightways, Inc.* 4,600 110
Consolidated Natural Gas Co. 12,000 479
Consolidated Papers, Inc. 5,500 270
Contel Cellular Inc. Class A* 12,300 223
Continental Bank Corp. 7,000 268
Continental Corp. 7,100 107
Cooper Industries, Inc. 14,900 590
Cooper Tire & Rubber Co. 11,400 295
Coors (Adolph) Co. Class B 5,000 101
Cordis Corp.* 1,900 104
CoreStates Financial Corp. 19,200 542
Corning Inc. 27,800 858
Countrywide Credit
Industries, Inc. 11,485 171
Cracker Barrel Old Country
Store, Inc. 7,500 193
Crane Co. 3,800 99
Cray Research, Inc.* 1,500 32
Crestar Financial Corp. 4,800 232
Crompton & Knowles Corp. 6,300 100
Crown Cork & Seal Co., Inc.* 11,300 421
Cummins Engine Co., Inc. 5,900 237
Cyprus Minerals Co. 12,200 397
Cytec Industries, Inc.* 1,685 55
DPL Inc. 14,550 295
DQE, Inc. 6,900 211
DSC Communications Corp.* 14,200 408
Dana Corp. 13,200 368
Danaher Corp. 3,700 164
Dauphin Deposit
Bank & Trust 3,800 96
Dayton Hudson Corp. 9,500 805
Dean Foods Co. 5,150 165
Dean Witter, Discover & Co. 22,695 967
Deere & Co. 11,500 854
Dell Computer Corp.* 4,900 159
Delmarva Power & Light Co. 7,400 141
Delta Air Lines, Inc. 6,500 323
Deluxe Corp. 10,400 315
Dentsply International, Inc.* 1,400 51
Department 56, Inc.* 2,800 107
Detroit Edison Co. 19,300 526
Dial Corp. 11,800 277
Diamond Shamrock, Inc. 3,800 102
Diebold, Inc. 5,275 227
Digital Equipment Corp.* 17,800 432
Dillard Department Stores,
Inc. Class A 14,100 395
Disney (Walt) Co. 71,200 2,928
Dole Food Company, Inc. 7,600 233
Dollar General Corp. 6,551 166
Dominion Resources, Inc. 22,650 852
Donnelley (R.R.) & Sons Co. 20,400 617
Dover Corp. 7,700 446
Dow Chemical Co. 36,800 2,765
Dow Jones & Co., Inc. 13,000 413
Dr Pepper/Seven-Up
Companies, Inc.* 8,300 192
Dresser Industries, Inc. 23,260 468
Du Pont (E.I.) de Nemours
& Co. 90,400 5,469
Duke Power Co. 27,300 1,058
Dun & Bradstreet Corp. 23,300 1,343
Duracell International, Inc. 15,000 690
E-Systems, Inc. 4,700 202
EG&G, Inc. 7,200 114
EMC Corp.* 24,000 432
ENSERCH Corp. 9,500 151
Eastman Chemical Co. 10,725 566
Eastman Kodak Co. 43,700 2,174
Eaton Corp. 9,800 486
Echlin Inc. 8,100 250
Ecolab Inc. 8,200 190
Edwards (A.G.) & Sons, Inc. 7,062 142
El Paso Natural Gas Co. 4,941 162
Electronic Arts* 6,200 111
Emerson Electric Co. 29,700 1,845
Energy Service Co., Inc.* 7,275 111
Engelhard Corp. 12,225 329
Enquirer/Star Group, Inc.
Class A 2,000 33
Enron Corp. 33,100 1,010
Enron Oil & Gas Co. 20,600 397
Entergy Corp. 30,721 764
Equifax Inc. 9,700 284
Equitable Companies, Inc. 18,800 402
Equitable Iowa Companies 4,000 156
Equitable Resources, Inc. 4,100 132
Ethyl Corp. 14,800 174
Exxon Corp. 165,500 9,847
FHP International Corp.* 4,300 117
FINA, Inc. Class A 2,000 152
FIserv, Inc.* 4,475 103
FMC Corp.* 4,600 269
FPL Group, Inc. 25,000 784
Family Dollar Stores, Inc. 6,600 83
Fastenal Co. 2,500 98
Federal Express Corp.* 7,300 517
Federal Home Loan
Mortgage Corp. 24,000 1,491
Federal Mogul Corp. 4,800 137
Federal National Mortgage
Association 36,500 3,244
Federal Paper Board Co., Inc. 5,500 167
Federal Signal Corp. 5,866 117
Federated Department
Stores, Inc.* 16,900 357
Ferro Corp. 3,500 93
Fifth Third Bank 7,950 411
Fingerhut Companies, Inc. 5,600 160
First American Corp. 3,200 109
</TABLE>
See accompanying Notes to Financial Statements.
44
<PAGE> 45
- --------------------------------------------------------------------------------
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
First Bancorporation
Ohio, Inc. 3,400 $ 85
First Bank System, Inc. 15,800 585
First Brands Corp. 2,500 87
First Chicago Corp. 11,400 593
First Colony Corp. 6,350 136
First Commerce Corp. 3,500 98
First Data Corp. 14,700 717
First Empire State Corp. 900 142
First Fidelity Bancorp 10,900 500
First Financial Management Corp. 7,750 471
First Hawaiian, Inc. 4,100 121
First Interstate Bancorp 11,100 887
First Security Corp. 6,075 196
First Tennessee National Corp. 4,150 197
First USA, Inc. 7,500 275
First Union Corp. 22,588 1,042
First Virginia Banks, Inc. 3,850 152
First of America Bank Corp. 8,100 297
Firstar Corp. 8,300 270
Fleet Financial Group, Inc. 18,000 713
Fleet Mortgage Group, Inc. 6,500 117
Fleetwood Enterprises, Inc. 5,500 145
Fleming Companies, Inc. 4,600 131
FlightSafety International, Inc. 4,200 164
Florida Progress Corp. 12,700 368
Flowers Industries, Inc. 4,600 78
Fluor Corp. 10,800 572
Food Lion, Inc. Class A 29,650 176
Food Lion, Inc. Class B 29,800 177
Ford Motor Co. 122,200 3,574
Forest Laboratories, Inc.* 5,600 263
Foster Wheeler USA 4,800 196
Foundation Health Corp.* 3,500 133
Fourth Financial Corp. 3,800 114
Franklin Quest Co.* 2,600 98
Franklin Resources, Inc. 11,000 433
Freeport-McMoRan Copper & Gold Inc. Class A 26,658 616
Freeport-McMoRan Inc. 19,000 328
Fruit of the Loom, Inc. Class A* 9,600 253
Fund American Enterprises Holdings, Inc.* 1,209 94
GATX Corp. 2,600 101
GEICO Corp. 9,500 470
GFC Financial Corp. 3,200 121
GTE Corp. 127,800 4,058
GTECH Holdings Corp.* 5,700 133
Gannett Co., Inc. 19,700 985
Gap, Inc. 19,200 826
Gardner Denver Machinery, Inc. 596 5
Gateway 2000* 5,400 80
Gaylord Entertainment Co. Class A 10,800 246
Genentech, Inc.* 15,400 791
General Dynamics Corp. 8,000 361
General Electric Co. 227,800 11,333
General Instrument Corp.* 15,800 482
General Mills, Inc. 20,900 1,129
General Motors Corp. 98,600 4,955
General Motors Corp. Class E 35,000 1,273
General Motors Corp. Class H 12,300 461
General Nutrition Companies, Inc.* 4,800 109
General Public Utilities Corp. 15,300 400
General Re Corp. 11,000 1,228
General Signal Corp. 6,600 238
Genuine Parts Co. 16,550 608
Genzyme Corp.* 2,800 95
Geon Co. 3,700 104
Georgia Gulf Corp.* 4,900 185
Georgia-Pacific Corp. 11,900 885
Giant Food Inc. Class A 7,500 163
Gillette Co. 29,500 2,135
Glatfelter (P.H.) Co. 5,700 91
Glenayre Technologies, Inc.* 2,000 114
Global Marine, Inc.* 19,700 79
Golden West Financial Corp. 8,100 351
Goodrich (BF) Co. 3,300 158
Goodyear Tire & Rubber Co. 20,200 707
Grace (W.R.) & Co. 12,100 487
Grainger (W.W.), Inc. 6,500 423
Great Atlantic & Pacific Tea Co., Inc. 4,700 113
Great Lakes Chemical Corp. 9,500 572
Great Western Financial Corp. 17,800 367
Green Tree Financial Corp. 8,400 281
HBO & Co. 4,800 158
Halliburton Co. 14,800 448
Hanna (M.A.) Co. 7,150 194
Hannaford Bros. Co. Inc. 4,700 112
Harcourt General, Inc. 10,500 354
Harland (John H.) Co. 4,300 91
Harley-Davidson, Inc. 4,900 277
Harris Corp. 4,900 237
Harsco Corp. 3,100 131
Hartford Steam Boiler Inspection & Ins. Co. 2,700 122
Hasbro, Inc. 11,550 362
Hawaiian Electric Industries, Inc. 3,900 124
Health Care and Retirement Corp.* 4,200 117
Health Management Associates, Inc. Class A* 6,075 145
Health Trust, Inc., The Hospital Co.* 12,300 378
Healthsource, Inc.* 3,900 128
Healthsouth Rehabilitation Corp.* 3,800 137
Heilig-Meyers Co. 6,150 165
Heinz (H.J.) Co. 33,300 1,220
Helmerich & Payne, Inc. 2,900 77
Herbalife International, Inc. 4,000 84
Hercules Inc. 5,600 603
Hershey Foods Corp. 12,100 581
Hewlett-Packard Co. 33,500 3,011
Hibernia Corp. Class A 11,200 92
Hillenbrand Industries, Inc. 9,100 303
Hilton Hotels Corp. 6,200 365
Home Depot, Inc. 60,166 2,723
Home Shopping Network, Inc.* 11,600 136
Homestake Mining Co. 18,200 344
Hon Industries Inc. 4,200 109
Honeywell Inc. 17,300 621
</TABLE>
See accompanying Notes to Financial Statements
45
<PAGE> 46
- --------------------------------------------------------------------------------
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Horace Mann Educators Corp. 3,800 $ 102
Hormel (George A.) & Co. 9,500 219
Hospitality Franchise Systems, Inc.* 6,000 176
Host Marriott Corp.* 20,100 224
Houghton Mifflin Co. 1,900 82
Household International, Inc. 12,100 478
Houston Industries Inc. 17,400 605
Hubbell Inc. Class A 600 32
Hubbell Inc. Class B 3,180 178
Humana Inc.* 21,400 455
Hunt (J.B.) Transport Services, Inc. 4,550 85
Huntington Bancshares Inc. 16,531 351
IBP, Inc. 5,900 186
IDB Communications Group, Inc.* 9,310 89
IES Industries Inc. 3,300 92
IMC Fertilizer, Inc.* 3,600 144
INTERCO Inc. (New)* 6,700 97
IPALCO Enterprises, Inc. 4,700 146
ITT Corp. 15,500 1,271
IVAX Corp. 12,000 239
Idaho Power Co. 4,300 104
Illinois Central Corp. Class A 5,850 184
Illinois Tool Works Inc. 15,000 649
Illinova Corp. 9,500 198
Infinity Broadcasting Corp. Class A* 4,150 132
Informix Corp.* 8,400 199
Ingersoll-Rand Co. 14,100 538
Inland Steel Industries, Inc.* 5,200 215
Integra Financial Corp. 4,200 205
Integrated Device Technology, Inc.* 4,500 105
Intel Corp. 55,900 3,668
International Business Machines Corp. 77,700 5,332
International Flavors & Fragrances, Inc. 15,900 698
International Game Technology 17,000 397
International Paper Co. 16,300 1,257
International Speciality Products Inc. 12,000 83
Interpublic Group of Companies, Inc. 9,600 331
Intuit, Inc.* 2,500 107
Itel Corp.* 4,300 148
James River Corp. 10,400 243
Jefferson-Pilot Corp. 6,600 356
Johnson & Johnson 85,900 4,306
Johnson Controls, Inc. 5,200 276
Jones Apparel Group, Ltd.* 3,300 83
Jostens, Inc. 5,900 108
KLA Instruments Corp.* 3,000 143
KU Energy Corp. 4,500 120
Kansas City Power & Light Co. 7,700 167
Kansas City Southern Industries, Inc. 6,700 260
Kellogg Co. 30,100 1,704
Kelly Services, Inc. Class A 4,625 146
Kendall International, Inc.* 2,400 132
Kennametal Inc. 3,400 85
Kerr-McGee Ctr. Corp. 6,700 326
KeyCorp, Inc. 32,723 1,076
Keystone International, Inc. 4,100 82
Kimberly-Clark Corp. 21,100 1,253
King World Productions, Inc.* 4,900 185
Kmart Corp. 53,300 913
Knight-Ridder, Inc. 7,100 367
Kohl's Corp.* 4,500 219
Kroger Co.* 14,500 368
LDDS Communications, Inc.* 16,078 376
LEGENT Corp.* 4,900 113
LG&E Energy Corp. 4,250 162
LIN Broadcasting Corp.* 6,900 928
LSI Logic Corp.* 6,900 217
LTV Corp.* 10,500 201
La Quinta Inns, Inc. 3,900 126
Lafarge Corp. 7,100 145
Lam Research Corp.* 2,900 104
Lancaster Colony Corp. 4,000 146
Lands' End, Inc. 4,600 93
Lee Enterprises, Inc. 2,800 97
Leggett & Platt, Inc. 5,200 192
Lehman Brothers Holdings, Inc. 12,680 206
Leucadia National Corp. 3,600 134
Lilly (Eli) and Co. 38,700 2,201
Limited, Inc. 48,100 968
Lincoln National Corp. 12,600 485
Linear Technology Corp. 4,500 201
Litton Industries, Inc.* 5,700 222
Liz Claiborne, Inc. 10,100 223
Lockheed Corp. 8,400 662
Loctite Corp. 4,700 213
Loews Corp. 8,500 774
Long Island Lighting Co. 15,600 281
Longs Drug Stores Inc. 2,400 83
Longview Fibre Co. 6,400 118
Loral Corp. 11,100 463
Lotus Development Corp.* 5,800 237
Louisiana Land & Exploration Co. 4,700 203
Louisiana-Pacific Corp. 14,500 515
Lowe's Companies, Inc. 21,000 759
Lubrizol Corp. 8,800 275
Lyondell Petrochemical Co. 10,100 317
MAPCO Petroleum Inc. 3,900 223
MBIA Corp. 5,400 331
MBNA 19,900 502
MCI Communications Corp. 72,500 1,767
MCN Corp. 4,100 159
MFS Communications, Inc.* 7,800 274
MGM Grand, Inc.* 6,300 178
Magma Copper Co. (New)* 6,100 110
Magma Power Co.* 2,700 77
Mallinckrodt Group, Inc. 9,500 306
Manor Care, Inc. 8,650 238
Manpower, Inc.* 9,800 260
Manville Corp.* 15,600 133
Marion Merrell Dow Inc. 36,600 865
Mark IV Industries, Inc. 5,395 111
Marquette Electronics Class A* 2,100 34
Marriott International, Inc. 17,500 516
Marsh & McLennan Companies, Inc. 9,800 834
Marshall & Ilsley Corp. 11,928 241
Martin Marietta Corp. 12,700 646
Marvel Entertainment Group, Inc.* 12,600 265
</TABLE>
See accompanying Notes to Financial Statements.
46
<PAGE> 47
- --------------------------------------------------------------------------------
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Masco Corp. 20,100 $ 558
Mascotech, Inc. 7,500 111
Mattel, Inc. 23,621 679
Maxim Integrated Products, Inc.* 1,800 110
Maxus Energy Corp.* 16,700 88
May Department Stores Co. 33,200 1,361
Maytag Corp. 13,500 246
McCaw Cellular Communications, Inc. Class A* 27,200 1,469
McClatchy Newspapers, Inc. Class A 4,200 109
McCormick & Co., Inc. 10,100 201
McDonald's Corp. 93,800 2,650
McDonnell Douglas Corp. 5,200 615
McGraw-Hill, Inc. 6,500 453
McKesson Corp. 5,400 554
McMoran Oil & Gas Co.* 1,900 7
McWhorter Technologies* 1,400 26
Mead Corp. 8,000 404
Media General, Inc. Class A 3,300 96
Medical Care America, Inc.* 4,124 122
Medtronic, Inc. 8,000 790
Mellon Bank Corp. 12,149 720
Melville Corp. 13,500 511
Mercantile Bancorp Inc. 5,550 212
Mercantile Bankshares Corp. 5,550 120
Mercantile Stores Co., Inc. 4,600 173
Merck & Co., Inc. 169,154 5,772
Mercury Finance Co. 15,409 245
Mercury General Corp. 3,300 93
Meridian Bancorp, Inc. 7,200 230
Merrill Lynch & Co., Inc. 27,000 1,097
Merry-Go-Round Enterprises, Inc. 200 0
Meyer (Fred), Inc.* 3,700 123
Michigan National Corp. 2,000 156
Microchip Technology, Inc.* 2,700 100
Micron Technology, Inc. 13,550 545
Microsoft Corp.* 79,600 4,622
Mid Atlantic Medical Services Inc.* 5,800 154
Midlantic Corp. 6,700 201
Midwest Resources Inc. 6,500 99
Miller (Herman), Inc. 2,900 72
Millipore Corp. 3,700 207
Minerals Technologies, Inc. 3,000 90
Minnesota Mining & Manufacturing Co. 56,600 3,120
Minnesota Power & Light Co. 3,700 100
Mirage Resorts, Inc.* 12,350 261
Mitchell Energy & Development Corp. Class A 3,000 59
Mitchell Energy & Development Corp. Class B 3,900 76
Mobil Corp. 53,200 4,482
Mobile Telecommunication Technologies Corp.* 3,800 87
Modine Manufacturing Co. 3,800 108
Molex Inc. 4,125 175
Molex Inc. Class A 4,075 160
Monsanto Co. 15,500 1,281
Montana Power Co. 6,800 161
Morgan (J.P.) & Co. Inc. 25,800 1,700
Morgan Stanley Group Inc. 10,700 746
Morrison Knudsen Corp. 4,000 72
Morrison Restaurants, Inc. 4,875 118
Morton International, Inc. 19,200 569
Motorola, Inc. 74,400 4,018
Multimedia, Inc.* 4,600 144
Murphy Oil USA 5,770 273
Mylan Laboratories Inc. 9,900 255
NBD Bancorp, Inc. 22,160 690
NICOR, Inc. 6,800 166
NIKE, Inc. Class B 9,500 612
NIPSCO Industries, Inc. 9,000 260
NWNL Companies, Inc. 3,600 113
NYNEX Corp. 55,800 2,155
Nalco Chemical Co. 8,900 301
National City Corp. 20,440 549
National Fuel Gas Co. 4,900 153
National Health Laboratories, Inc. 11,700 145
National Medical Enterprises, Inc. 20,900 381
National Semiconductor Corp.* 15,100 281
National Service Industries, Inc. 6,200 167
NationsBank Corp. 35,984 2,006
Navistar International Corp.* 9,350 153
Neiman Marcus Group, Inc. 1,500 21
Nevada Power Co. 4,700 97
New England Electric Co. 8,200 272
New York State Electric & Gas Corp. 9,100 189
New York Times Co. Class A 14,113 346
Newell Co. 10,137 483
Newmont Gold Co. 13,800 564
Newmont Mining Corp. 11,232 482
Nextel Communications, Inc.* 10,600 278
Niagara Mohawk Power Corp. 18,300 272
Nine West Group, Inc.* 4,700 133
Noble Affiliates, Inc. 6,400 165
Noram Energy Corp. 14,715 107
Nordson Corp. 2,200 130
Nordstrom, Inc. 10,900 514
Norfolk Southern Corp. 18,300 1,176
Northeast Utilities 17,700 412
Northern States Power Co. 9,000 389
Northern Trust Corp. 7,250 276
Northrop Corp. 6,100 275
Norwest Corp. 42,488 1,131
NovaCare, Inc.* 8,200 128
Novell, Inc.* 49,200 766
Nucor Corp. 11,500 794
Occidental Petroleum Corp. 39,700 883
Office Depot, Inc.* 18,300 435
Ogden Corp. 5,600 125
Ogden Projects, Inc.* 5,100 87
Ohio Casualty Group of Insurance Cos. 4,400 139
Ohio Edison Co. 19,300 374
Oklahoma Gas & Electric Co. 4,900 168
Old Kent Financial Corp. 5,300 186
Old National Bancorp 2,415 89
Old Republic International Corp. 7,300 162
Olin Corp. 3,000 173
</TABLE>
See accompanying Notes to Financial Statements.
47
<PAGE> 48
- --------------------------------------------------------------------------------
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Olsten Corp. 5,550 $ 200
Omnicom Group Inc. 4,800 241
Oracle Systems Corp.* 38,600 1,648
Oryx Energy Co. 12,000 173
Outback Steakhouse, Inc.* 5,250 158
Overseas Shipholding Group, Inc. 3,900 78
Owens-Corning Fiberglas Corp.* 5,300 189
Owens-Illinois, Inc.* 14,700 171
Oxford Health Plans, Inc.* 2,000 142
PACCAR Inc. 5,060 254
PECO Energy Co. 29,200 796
PET Inc. 13,400 271
PHH Corp. 2,000 74
PNC Bank Corp. 30,700 860
PPG Industries, Inc. 27,800 1,157
PSI Resources, Inc. 7,200 161
PacifiCare Health Systems, Inc. Class A* 1,700 123
PacifiCare Health Systems, Inc. Class B* 3,100 213
PacifiCorp 36,700 628
Pacific Enterprises 10,600 227
Pacific Gas & Electric Co. 56,400 1,389
Pacific Telecom, Inc. 4,900 115
Pacific Telesis Group 55,700 1,838
Paging Network, Inc.* 6,600 186
Paine Webber Group Inc. 10,125 165
Pall Corp. 14,433 260
Panhandle Eastern Corp. 15,000 328
Parametric Technology Corp.* 7,000 202
Parker Hannifin Corp. 6,200 260
Paychex, Inc. 3,600 119
Penney (J.C.) Co., Inc. 31,500 1,658
Pennsylvania Power & Light Co. 19,120 404
Pennzoil Co. 5,800 297
Pentair, Inc. 2,400 98
Peoples Energy Corp. 4,500 120
Pep Boys - Manny, Moe & Jack 7,900 276
PepsiCo, Inc. 105,100 3,481
Perkin-Elmer Corp. 5,800 173
Perrigo Co.* 9,800 151
Petrie Stores Corp. 6,000 159
Petsmart, Inc.* 3,300 116
Pfizer Inc. 42,900 2,928
Phelps Dodge Corp. 9,300 591
Philip Morris Companies Inc. 116,700 7,119
Phillips Petroleum Co. 34,500 1,143
Phillips-Van Heusen Corp. 3,200 74
Physician Corp. of America* 5,500 118
Pinnacle West Capital Corp. 10,700 198
Pioneer Hi-Bred International, Inc. 12,000 378
Pitney Bowes Inc. 21,000 809
Pittston Co. 5,500 153
Pogo Producing Co. 4,300 88
Polaroid Corp. 5,800 204
Policy Management Systems Corp.* 1,500 56
Portland General Corp. 5,700 102
Potlatch Corp. 3,700 163
Potomac Electric Power Co. 14,800 298
Praxair, Inc. 17,100 389
Premark International, Inc. 8,000 362
Premier Industrial Corp. 10,650 240
Price (T. Rowe) Associates, Inc. 4,100 130
Price/Costco, Inc.* 27,504 433
Primadonna Resorts, Inc.* 3,900 113
Procter & Gamble Co. 91,000 5,540
Progressive Corp. 9,600 362
Promus Companies Inc.* 13,200 485
Provident Life & Accident Ins. Co. Class A 1,200 32
Provident Life & Accident Ins. Co. Class B 4,600 136
Providian Corp. 13,400 451
Public Service Co. of Colorado 8,300 225
Public Service Enterprise Group Inc. 32,000 888
Puget Sound Power & Light Co. 7,900 157
Pulte Corp. 3,600 89
Pyxis Corp.* 4,200 110
QUALCOMM Inc.* 6,200 142
QVC, Inc.* 6,900 311
Quaker Oats Co. 9,100 731
Questar Corp. 5,200 161
RJR Nabisco Holdings Corp.* 230,500 1,614
RPM, Inc. 7,400 131
Ralcorp Holdings, Inc.* 4,566 79
Ralston Purina Co. 13,700 555
Raychem Corp. 5,900 246
Rayonier, Inc. 3,875 129
Raytheon Co. 18,100 1,224
Reader's Digest Association, Inc. Class A 12,400 527
Reader's Digest Association, Inc. Class B 2,600 103
Reebok International Ltd. 11,000 400
Regions Financial Corp. 4,850 175
Reliance Electric Co. Class A* 5,900 151
Republic New York Corp. 6,600 299
Revco D.S., Inc.* 6,300 120
Reynolds & Reynolds Co. Class A 5,600 148
Reynolds Metals Co. 8,100 444
Rhone-Poulenc Rorer Inc. 18,000 666
Rite Aid Corp. 11,900 245
Riverwood International Corp. 9,300 163
Roadway Services, Inc. 5,400 346
Roberts Pharmaceutical Corp.* 800 27
Rochester Gas & Electric Corp. 4,600 105
Rochester Telephone Corp. 21,600 486
Rockwell Internationl Corp. 29,500 1,066
Rohm & Haas Co. 8,900 554
Rollins, Inc. 4,600 116
Rouse Co.* 6,700 129
Rowan Companies, Inc.* 11,500 85
Rubbermaid Inc. 21,100 593
Russell Corp. 5,000 162
Rust International, Inc.* 10,600 140
Ryder System, Inc. 9,500 261
SAFECO Corp. 8,300 452
SCANA Corp. 6,300 287
</TABLE>
See accompanying Notes to Financial Statements.
48
<PAGE> 49
- --------------------------------------------------------------------------------
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
SCEcorp. 58,400 $ 796
SPS Transaction Service, Inc.* 1,600 86
SYSCO Corp. 23,900 612
Safety-Kleen Corp. 7,100 120
Safeway Inc.* 17,000 465
Salomon Inc. 14,400 625
San Diego Gas & Electric Co. 14,600 285
Santa Fe Energy Resources, Inc. 10,900 104
Santa Fe Pacific Corp. 24,200 520
Sara Lee Corp. 63,900 1,478
Scherer (R.P.) Corp.* 3,000 122
Schering-Plough Corp. 25,400 1,775
Schulman (A.), Inc. 4,562 121
Scientific-Atlanta, Inc. 4,600 206
Scott Paper Co. 9,800 642
Scripps (E.W.) Co. Class A 9,700 283
Scripps Howard Broadcasting Div. 1,500 148
Seagate Technology, Inc.* 9,400 225
Seagull Energy Corp.* 4,600 110
Sears, Roebuck & Co. 46,900 2,222
Sensormatic Electronics Corp. 8,950 310
Service Corp. International 10,800 286
Service Merchandise Co., Inc.* 12,662 78
Shaw Industries, Inc. 18,000 313
Shawmut National Corp. 15,700 353
Sherwin-Williams Co. 11,400 378
Shoney's, Inc.* 5,200 71
Sigma-Aldrich Corp. 6,300 221
Signet Banking Corp. 7,400 290
Silicon Graphics, Inc.* 17,600 462
Sithe Energies, Inc.* 7,600 87
Smith (A.O.) Corp. Class A 200 6
Smith (A.O.) Corp. Class B 900 25
Smucker (J.M.) Co. Class A 1,800 42
Smucker (J.M.) Co. Class B 1,900 40
Snap-on, Inc. 5,300 194
Snapple Beverage Corp.* 16,300 222
Solectron Corp.* 5,600 171
Sonat Inc. 11,200 342
Sonoco Products Co. 11,000 246
Sotheby's Holdings, Inc. Class A 4,900 62
Southern Co. 85,700 1,618
Southern National Corp. 5,400 113
Southern New England Telecommunications 8,100 266
Southern Pacific Rail Corp.* 21,900 443
Southtrust Corp. 10,025 212
Southwest Airlines Co. 18,300 485
Southwestern Bell Corp. 80,200 3,318
Southwestern Public Service Co. 5,100 136
Spiegel, Inc. Class A 15,700 306
Springs Industries, Inc. 400 15
Sprint Corp. 45,434 1,800
St. Joe Paper Co. 3,900 236
St. Jude Medical, Inc. 6,100 211
St. Paul Companies, Inc. 10,800 467
Standard Federal Bank 3,800 105
Stanhome Inc. 2,600 91
Stanley Works 5,700 247
Staples, Inc.* 4,950 152
Star Banc Corp. 4,100 176
Starbucks Corp.* 3,700 104
State Street Boston Corp. 10,200 407
Stewart & Stevenson Services, Inc. 4,300 161
Stone Container Corp.* 11,400 225
Stop & Shop Companies, Inc.* 6,300 172
Storage Technology Corp.* 5,200 187
Stratus Computer, Inc.* 3,100 118
Stride Rite Corp. 6,000 95
Stryker Corp. 6,000 214
Student Loan Marketing Association (Voting) 11,300 435
Sun Co., Inc. 14,100 393
Sun Microsystems, Inc.* 13,200 350
Sun Trust Banks, Inc. 15,900 813
SunGard Data Systems Inc.* 2,400 83
Sunamerica, Inc. 5,400 240
Sunbeam-Oster Co., Inc. 12,700 287
Sundstrand Corp. 4,500 224
Super Valu Stores, Inc. 9,100 270
Superior Industries International, Inc. 4,200 124
Sybase, Inc.* 6,200 270
Sybron Corp.* 3,000 98
SynOptics Communications, Inc.* 7,700 123
Synopsys, Inc.* 2,300 95
Synovus Financial Corp. 8,100 150
TIG Holdings, Inc. 7,900 163
TJX Companies, Inc. 9,100 198
TRINOVA Corp. 3,700 140
TRW Inc. 8,400 630
Tambrands Inc. 4,800 178
Tandem Computers Inc.* 14,300 216
Tandy Corp. 8,458 340
Teco Energy Co. 15,300 302
Tecumseh Products Co. Class A 2,400 117
Tecumseh Products Co. Class B 800 39
Tektronix, Inc. 4,000 138
Tele-Communications, Inc. Class A (New)* 73,846 1,666
Teledyne, Inc. 7,200 128
Telephone & Data Systems, Inc. 6,500 283
Tellabs, Inc.* 5,400 227
Temple-Inland Inc. 7,200 406
Tenneco, Inc. 23,100 1,138
Teradyne, Inc.* 4,300 128
Texaco Inc. 34,600 2,137
Texas Instruments Inc. 12,300 958
Texas Utilities Co. 29,800 998
Textron Inc. 11,600 641
Thermo Electron Corp.* 6,750 303
Thermo Instrument Systems Inc.* 5,700 175
Thomas & Betts Corp. 2,300 148
Tidewater Inc. 6,400 145
Time Warner Inc. 50,580 1,928
Times Mirror Co. Class A 16,600 546
Timken Co. 3,900 152
Tootsie Roll Industries, Inc. 1,391 88
Torchmark Corp. 9,250 394
Tosco Corp. 3,900 117
Total System Services, Inc. 4,100 118
</TABLE>
See accompanying Notes to Financial Statements.
49
<PAGE> 50
- --------------------------------------------------------------------------------
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF NET ASSETS
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Toys 'R' Us, Inc.* 38,500 1,420
Transamerica Corp. 10,500 560
Transatlantic Holdings, Inc. 2,800 151
Transco Energy Co. 5,500 84
Travelers Corp. 45,317 1,677
TriMas Corp. 5,300 127
Tribune Co. 8,900 478
Trinity Industries, Inc. 5,250 179
Triton Energy Corp.* 4,400 140
Turner Broadcasting System, Inc. Class A 8,800 161
Turner Broadcasting System, Inc. Class B 16,400 297
Tyco International, Ltd. 5,900 260
Tyson Foods, Inc. Class A 19,800 478
U.S. Bancorp 13,250 366
U.S. Healthcare, Inc. 21,225 921
UAL Corp.* 1,600 162
UGI Corp. 3,900 76
UJB Financial Corp. 6,400 186
UMB Financial 176 6
UNUM Corp. 10,008 492
US WEST, Inc. 60,510 2,443
USF&G Corp. 10,400 140
USG Corp.* 6,200 140
USLIFE Corp. 2,900 104
UST Inc. 27,500 859
USX-Marathon Group 37,600 649
USX-U.S. Steel Group 9,560 390
Ultramar Corp. 4,900 128
Unifi, Inc. 8,825 212
Union Bank 4,900 151
Union Camp Corp. 9,200 463
Union Carbide Corp. 20,200 694
Union Electric Co. 13,000 465
Union Pacific Corp. 27,300 1,573
Union Texas Petroleum Holdings, Inc. 12,000 215
Unisys Corp.* 21,100 208
United HealthCare Corp. 22,200 1,160
United States Cellular Corp.* 7,100 220
United States Shoe Corp. 5,900 130
United States Surgical Corp. 7,100 183
United Technologies Corp. 16,900 1,075
Unitrin, Inc. 6,600 328
Universal Corp. 4,400 95
Universal Foods Corp. 3,300 106
Unocal Corp. 32,034 917
Upjohn Co. 22,800 824
UtiliCorp United Inc. 5,700 164
V.F. Corp. 8,200 434
Valassis Communications, Inc.* 5,800 85
Valero Energy Corp. 5,300 107
Valley National Bancorp 3,547 96
Valspar Corp. 2,800 96
Value Health, Inc.* 5,750 283
Vanguard Cellular Systems, Inc.* 4,650 130
Varian Associates, Inc. 4,800 185
Varity Corp.* 5,700 215
Viacom Inc. Class A* 10,500 398
Viacom Inc. Class B* 15,226 502
Viking Office Products, Inc.* 4,800 138
Vishay Intertechnology, Inc.* 2,829 122
Vons Companies, Inc.* 5,700 91
Vulcan Materials Co. 4,800 254
WMS Industries Inc.* 1,200 23
WMX Technologies, Inc. 64,600 1,938
WPL Holdings, Inc. 3,500 105
Wachovia Corp. 22,720 795
Wal-Mart Stores, Inc. 306,000 7,535
Walgreen Co. 15,900 598
Wallace Computer Services, Inc. 2,900 99
Wang Laboratories, Inc.* 4,300 51
Warnaco, Inc. Class A* 2,800 102
Warner-Lambert Co. 17,900 1,497
Washington Federal Savings Bank 4,895 106
Washington Gas Light Co. 2,400 91
Washington Mutual Savings Bank 7,725 162
Washington Post Co. Class B 1,500 351
Washington Water Power Co. 6,000 92
Watts Industries, Inc. Class A 300 7
Wausau Paper Mills Co. 3,688 95
Weatherford International Inc.* 6,900 84
Weis Markets, Inc. 5,200 132
Wellfleet Communications, Inc.* 8,000 182
Wellman, Inc. 4,400 140
Wellpoint Health Networks, Inc. Class A* 2,700 73
Wells Fargo & Co. 7,300 1,166
Wendy's International, Inc. 13,900 221
Werner Enterprises, Inc. 3,300 85
Wesco Financial Corp. 1,000 121
West One Bancorp 4,300 133
Western Atlas, Inc.* 5,700 253
Western Gas Resources, Inc. 3,000 66
Western Resources, Inc. 8,431 242
Westinghouse Electric Corp. 46,900 662
Westvaco Corp. 8,300 301
Weyerhaeuser Co. 27,300 1,252
Wheelabrator Technologies Inc. 25,200 432
Whirlpool Corp. 10,000 549
White River Corp.* 754 26
Whitman Corp. 13,800 238
Willamette Industries, Inc. 7,300 374
Williams Companies, Inc. 13,900 433
Wilmington Trust Corp. 4,900 132
Winn-Dixie Stores, Inc. 9,600 510
Wisconsin Energy Corp. 13,500 351
Wisconsin Public Service Corp. 3,000 87
Witco Corp. 7,900 243
Woolworth Corp. 16,500 268
Worthington Industries, Inc. 11,400 248
Wrigley (Wm.) Jr. Co. 15,100 617
XTRA Corp. 2,200 110
Xerox Corp. 14,100 1,510
Xilinx, Inc.* 2,900 129
York International Corp. 4,700 194
Zilog, Inc.* 2,400 78
Zurich Reinsurance Centre Holdings, Inc.* 3,400 70
20th Century Industries 6,300 82
3COM Corp.* 4,200 281
-------
TOTAL COMMON STOCK
(Cost $468,748) 551,897
=======
</TABLE>
See accompanying Notes to Financial Statements.
50
<PAGE> 51
- --------------------------------------------------------------------------------
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maturity Value
(000s) (000s)
------ ------
<S> <C> <C>
REPURCHASE AGREEMENT -- 0.2%
PNC Securities Corp. 4.80%
Dated 8/31/94
Due 9/01/94
Collateralized By:
Federal National
Mortgage Association:
$1,730,000 Par; 6.25%
Due 12/25/19 $869 $ 869
--------
TOTAL REPURCHASE AGREEMENTS
(Cost $869) 869
--------
TOTAL INVESTMENTS -- 99.8%
(Cost $469,617) 552,766
--------
OTHER ASSETS AND LIABILITIES -- 0.2%
Other Assets 2,261
Liabilities (966)
--------
1,295
--------
NET ASSETS -- 100.0%
Applicable to 42,367,538
outstanding $0.00001
par value shares
(unlimited shares authorized) $554,061
========
NET ASSET VALUE PER SHARE $13.08
======
- ------------------
*Non-Income Producing Security
</TABLE>
See accompanying Notes to Financial Statements.
51
<PAGE> 52
- --------------------------------------------------------------------------------
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENT OF OPERATIONS (in thousands)
For the year ended August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends $13,396
Interest 84
-------
Total investment income 13,480
-------
Expenses:
Investment advisory and administration fee 1,555
Transfer agency and shareholder service fees 878
Custodian fees 210
Registration fees 48
Professional fees 47
Shareholder reports 86
Trustees' fees 30
Amortization of deferred organization costs 49
Insurance and other expenses 46
-------
2,949
Less expenses reduced (290)
-------
Total expenses incurred by Fund 2,659
-------
Net investment income 10,821
-------
Net realized gain (loss) on investments:
Proceeds from sales of investments 15,350
Cost of investments sold (16,609)
-------
Net realized loss on investments sold (1,259)
-------
Change in net unrealized appreciation (depreciation) on investments:
Beginning of period 69,885
End of period 83,149
-------
Increase in net unrealized appreciation on investments 13,264
-------
Net increase in net assets resulting from operations $22,826
=======
</TABLE>
See accompanying Notes to Financial Statements.
52
<PAGE> 53
- --------------------------------------------------------------------------------
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
For the eight month
year ended period ended
August 31, 1994 August 31, 1993
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income $ 10,821 $ 6,673
Net realized loss on investments sold (1,259) (1,769)
Increase in net unrealized
appreciation on investments 13,264 31,176
-------- --------
Net increase in net assets resulting
from operations 22,826 36,080
-------- --------
Dividends to shareholders from net
investment income (10,613) (4,707)
-------- --------
Capital Share Transactions:
Proceeds from shares sold 152,247 182,143
Net asset value of shares issued in
reinvestment of dividends 9,565 4,284
Early withdrawal fees 84 110
Less payments for shares redeemed (135,320) (73,618)
-------- --------
Increase in net assets from capital
share transactions 26,576 112,919
-------- --------
Total increase in net assets 38,789 144,292
Net Assets:
Beginning of period 515,272 370,980
-------- --------
End of period (including undistributed
net investment income of $2,174
amd $1,966, respectively) $554,061 $515,272
======== ========
Number of Fund Shares:
Sold 11,974 14,889
Reinvested 761 346
Redeemed (10,627) (5,987)
-------- --------
Net increase in shares outstanding 2,108 9,248
Shares Outstanding:
Beginning of period 40,260 31,012
-------- --------
End of period 42,368 40,260
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
53
<PAGE> 54
- --------------------------------------------------------------------------------
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1994
- --------------------------------------------------------------------------------
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. During 1993, the Trust elected to
change its fiscal year end from December 31 to August 31.
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 sub-adviser 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 and 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.
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.
54
<PAGE> 55
- --------------------------------------------------------------------------------
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At August 31, 1994, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $83,149,000 of which $104,113,000 related
to appreciated securities and $20,964,000 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
$1,555,000 during the year ended August 31, 1994.
Sub-advisory agreement -- The Investment Manager has a sub-advisory agreement
with Dimensional Fund Advisors Inc. ("Dimensional") to perform day-to-day
portfolio management for the Fund. Dimensional does not receive compensation
directly from the Fund. However, the Investment Manager pays 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.
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). Commencing January 1, 1994, for services provided under these
agreements, Schwab receives an annual fee, payable monthly, of .05% of the
average daily net assets for transfer agency services and .20% of such assets
for shareholder services. For the period from January 1, 1994 through August 31,
1994, the Fund incurred transfer agency and shareholder service fees of
$878,000, before Schwab reduced its fees (see Note 5).
Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers or directors of the Investment Manager or Schwab.
During the year ended August 31, 1994, 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 and expenses
of $30,000 related to the Trust's unaffiliated trustees.
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, 1994, no borrowings were made under this
arrangement.
5. EXPENSES REDUCED BY SCHWAB
During the year ended August 31, 1994, Schwab reduced a portion of its fees in
order to limit the Fund's ratio of operating expenses to average net assets; the
total of such fee reductions was $290,000.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated (in thousands) $44,124 and $15,350, respectively, during the year
ended August 31, 1994.
55
<PAGE> 56
- --------------------------------------------------------------------------------
SchwabFunds(R) 15
- --------------------------------------------------------------------------------
SCHWAB 1000 FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1994
- --------------------------------------------------------------------------------
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, 1994, total early withdrawal fees
retained by the Fund amounted to $84,000.
8. COMPOSITION OF NET ASSETS
At August 31, 1994, net assets consisted of:
<TABLE>
<S> <C>
Capital paid in $472,156,000
Undistributed net investment income 2,174,000
Net realized loss on investments sold (3,418,000)
Net unrealized appreciation on investments 83,149,000
------------
Total $554,061,000
============
</TABLE>
At August 31, 1994, the Fund's Statement of Net Assets included liabilities of
$452,000 for Fund shares redeemed, $135,000 for investment advisory and
administration fee payable and $92,000 for transfer agency and shareholder
service fees payable.
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
For the period
For the April 2, 1991
For the eight month For the (commencement
year ended period ended year ended of operations) to
August 31, August 31, December 31, December 31,
1994 1993 1992 1991
---------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period $ 12.80 $ 11.96 $ 11.26 $ 10.00
Income from Investment Operations
Net investment income .26 .17 .24 .15
Net realized and unrealized
gain on investments .28 .79 .71 1.26
-------- -------- -------- --------
Total from investment operations .54 .96 .95 1.41
Less Distributions
Dividends from net
investment income (.26) (.12) (.25) (.15)
Distributions from realized
gain on investments -- -- -- --
-------- -------- -------- --------
Total distributions (.26) (.12) (.25) (.15)
-------- -------- -------- --------
Net asset value at end of period $ 13.08 $ 12.80 $ 11.96 $ 11.26
======== ======== ======== ========
Total return (%) 4.28 8.06 8.52 14.25
Ratios/Supplemental Data
Net assets, end of period (000s) $554,061 $515,272 $370,980 $192,206
Ratio of expenses to average
net assets (%) .51 .45* .35 --*
Ratio of net investment income
to average net assets (%) 2.06 2.21* 2.45 3.21*
Portfolio turnover rate (%) 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
56
<PAGE> 57
- --------------------------------------------------------------------------------
SchwabFunds(R) 16
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
August 31, 1994, 1993, December 31, 1992 and 1991 would have been .56%, .49%*,
.52% and 1.05%*, respectively, and the ratio of net investment income to average
net assets would have been 2.01%, 2.17%*, 2.28% and 2.16%*, respectively.
* Annualized
57
<PAGE> 58
- --------------------------------------------------------------------------------
SchwabFunds(R) 17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of 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, 1994, the results of its operations and the changes in its net
assets for each of 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, 1994 by correspondence with the
custodian and broker, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE, LLP
San Francisco, California
September 29, 1994
1994 SPECIAL TAX INFORMATION (UNAUDITED)
_____________________________________________________________________________
NOTICE TO CORPORATE SHAREHOLDERS
---------------------------------
100% of the Fund's distributions for the fiscal year ended August 31, 1994
qualify for the corporate dividends received deduction.
_____________________________________________________________________________
58
<PAGE> 59
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
Par Value
--- -----
<S> <C> <C>
AGENCY OBLIGATIONS--26.0%(a)
Federal Farm Credit Bank
7.55% 03/25/99 $5,000 $ 5,111
Federal Home Loan Bank
5.19% 06/13/95 5,000 4,989
5.50% 04/29/97 5,000 4,949
6.52% 05/23/97 3,000 2,999
6.495% 07/07/97 5,000 4,992
Federal National Mortgage
Association
5.25% 06/30/95 5,000 4,993
5.60% 12/29/95 5,000 4,982
7.50% 03/10/99 6,000 6,075
Student Loan Marketing
Association
7.625% 03/13/95 5,000 5,060
4.625% 03/02/99 5,000 4,800
TOTAL AGENCY OBLIGATIONS --------
(Cost $49,208) 48,950
COLLATERALIZED MORTGAGE --------
OBLIGATIONS
(PLANNED AMORTIZATION
CLASS I)--24.4%(a)(b)
Federal Home Loan Mortgage
Corp. 1255 E
7.50% 06/15/97 5,000 4,995
Federal Home Loan Mortgage
Corp. 1339 PG
7.00% 07/15/96 5,000 4,976
Federal Home Loan Mortgage
Corp. 1365 PE
5.75% 03/15/97 5,000 4,865
Federal Home Loan Mortgage
Corp. 1699 B
5.65% 08/15/97 5,000 4,814
Federal National Mortgage
Association 165 G
7.25% 09/25/94 4 4
Federal National Mortgage
Association 1989 101 G
8.00% 01/25/96 7,000 7,160
Federal National Mortgage
Association 1993 018 PD
6.00% 09/25/97 5,000 4,853
Federal National Mortgage
Association 1993 056 PC
5.50% 09/25/97 5,000 4,782
Federal National Mortgage
Association 1993 134 D
5.90% 03/25/99 5,000 4,706
Federal National Mortgage
Association FN 1994 4 PA
6.625% 10/25/96 4,781 4,749
TOTAL COLLATERALIZED MORTGAGE -------
OBLIGATIONS (PLANNED
AMORTIZATION CLASS I)
(Cost $46,629) 45,904
MORTGAGE PASS-THROUGH -------
SECURITIES--1.2%(a)(b)
Federal Home Loan Mortgage Corp.
6.50% 10/01/96 2,237 2,225
TOTAL MORTGAGE PASS-THROUGH -------
SECURITIES
(Cost $2,238) 2,225
U.S. TREASURY -------
OBLIGATIONS--41.6%(a)
U.S. Treasury Bonds
8.375% 08/15/95 5,000 5,119
U.S. Treasury Notes
7.50% 01/31/96 3,600 3,683
7.50% 02/29/96 6,500 6,651
7.75% 03/31/96 3,575 3,673
5.50% 04/30/96 2,000 1,986
7.375% 05/15/96 15,825 16,176
7.00% 09/30/96 8,875 9,025
6.25% 01/31/97 5,000 5,000
8.50% 05/15/97 10,000 10,525
6.00% 11/30/97 10,000 9,852
7.875% 01/15/98 1,700 1,767
5.125% 06/30/98 5,000 4,747
TOTAL U.S. TREASURY OBLIGATIONS --------
(Cost $78,397) 78,204
--------
</TABLE>
<TABLE>
<CAPTION>
Maturity
<S> <C> <C>
REPURCHASE
AGREEMENT--6.8%(a)
HSBC Securities, Inc. 4.80%
Dated 8/31/94 Due 9/01/94
Collateralized By:
Student Loan
Marketing Association:
$13,025 Par; 4.28%
Due 1/23/97 12,863 12,863
TOTAL REPURCHASE AGREEMENT
(Cost $12,863) 12,863
TOTAL INVESTMENTS--100.0%
(Cost $189,335) $188,146
========
</TABLE>
See accompanying Notes to Schedules of Investments.
59
<PAGE> 60
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
AGENCY OBLIGATIONS -- 17.5%(a)
Federal Home Loan Bank
6.72%, 03/03/04 $250 $ 231
8.35%, 09/07/04 500 501
Federal National Mortgage
Association
6.80% 01/10/03 200 192
8.05% 07/14/04 200 201
8.18% 04/15/24 200 193
TOTAL AGENCY OBLIGATIONS ------
(Cost $1,363) 1,318
COLLATERALIZED MORTGAGE ------
OBLIGATIONS
(PLANNED AMORTIZATION
CLASS I)--5.8%(a)(b)
Federal National Mortgage
Association 1993 079 PH
6.50% 06/25/03 250 229
Federal National Mortgage
Association 1993 099 PH
6.50% 06/25/03 230 210
TOTAL COLLATERALIZED MORTGAGE ------
OBLIGATIONS (PLANNED
AMORTIZATION CLASS I)
(Cost $465) 439
U.S. TREASURY ------
OBLIGATIONS--76.7%(a)
U.S. Treasury Bills
4.212% 10/13/94 25 25
4.415% 10/20/94 80 79
4.427% 10/20/94 110 109
U.S. Treasury Bonds
7.25% 05/15/16 1,030 991
7.50% 11/15/16 800 790
U.S. Treasury Notes
6.875% 04/30/97 1,185 1,200
5.625% 08/31/97 830 812
5.125% 06/30/98 700 665
5.75% 08/15/03 660 599
7.25% 05/15/04 500 502
------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $5,894) 5,772
TOTAL INVESTMENTS--100.0% ------
(Cost $7,722) $7,529
======
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS.
(a) Interest rates represent coupon rate of security, except for repurchase
agreements and Treasury Bills which show yield at the time of purchase.
(b) Maturity dates represent weighted average maturities of the underlying
mortgage obligations.
See accompanying Notes to Financial Statements.
60
<PAGE> 61
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES (in thousands)
August 31, 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $189,335 and $7,722, respectively)
$188,146 $7,529
Cash -- 4
Interest receivable 2,461 108
Receivable for fund shares sold 178 18
Deferred organization costs 34 46
Prepaid expenses and other assets 44 2
-------- ------
Total assets 190,863 7,707
-------- ------
LIABILITIES
Payable for:
Dividends 169 8
Investments purchased -- 500
Fund shares redeemed 99 3
Deferred organization costs -- 57
Investment advisory and administration fee 43 --
Transfer agency and shareholder service fees 30 --
Other 43 31
-------- ------
Total liabilities 384 599
-------- ------
Net assets applicable to outstanding shares $190,479 $7,108
======== ======
NET ASSETS CONSIST OF:
Capital paid in $199,137 $7,590
Accumulated undistributed
net investment income 44 1
Accumulated net realized loss
on investments sold (7,513) (290)
Net unrealized depreciation
on investments (1,189) (193)
-------- ------
$190,479 $7,108
======== ======
THE PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 19,410 762
Net asset value, offering and
redemption price per share $9.81 $9.33
</TABLE>
See accompanying Notes to Financial Statements
61
<PAGE> 62
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS (in thousands)
For the year ended August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Interest income $ 14,238 $ 319
--------- -------
Expenses:
Investment advisory and
administration fee 993 19
Transfer agency and
shareholder service fees 606 13
Custodian fees 138 33
Registration fees 82 11
Professional fees 34 15
Shareholder reports 46 1
Trustees' fees 16 --
Amortization of deferred organization costs 16 12
Insurance and other expenses 20 6
--------- -------
1,951 110
Less expenses reduced and absorbed (497) (105)
--------- -------
Total expenses incurred by Fund 1,454 5
--------- -------
Net investment income 12,784 314
--------- -------
Net realized gain (loss) on investments:
Proceeds from sales of investments 268,517 9,310
Cost of investments sold (275,774) (9,603)
--------- -------
Net realized loss on investments sold (7,257) (293)
--------- -------
Change in net unrealized appreciation
(depreciation) on investments:
Beginning of period 8,904 100
End of period (1,189) (193)
--------- -------
Decrease in net unrealized
appreciation on investments (10,093) (293)
--------- -------
Net decrease in net assets resulting
from operations $ (4,566) $ (272)
========= =======
</TABLE>
See accompaying Notes to Financial Statements
62
<PAGE> 63
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Short/Intermediate Schwab Long-Term
Government Bond Fund Government Bond Fund
---------------------------------- ------------------------------------
For the period
For the March 5, 1993
For the eight month For the (commencement
year ended period ended year ended of operations) to
August 31, 1994 August 31, 1993 August 31, 1994 August 31, 1993
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 12,784 $ 8,995 $ 314 $ 31
Net realized gain (loss) on
investments sold (7,257) 2,851 (293) 3
Increase (decrease) in net
unrealized appreciation
on investments (10,093) 6,195 (293) 100
--------- -------- ------ ------
Net increase (decrease) in
net assets resulting from
operations (4,566) 18,041 (272) 134
--------- -------- ------ ------
Distributions to shareholders from:
Net investment income (12,766) (8,969) (313) (31)
Capital gains (3,107) -- -- --
--------- -------- ------ ------
Total distributions to
shareholders (15,873) (8,969) (313) (31)
--------- -------- ------ ------
Capital Share Transactions:
Proceeds from shares sold 109,509 146,229 11,250 2,876
Net asset value of shares
issued in reinvestment
of dividends 12,609 7,947 207 27
Less payments for shares
redeemed (185,173) (115,498) (6,570) (200)
--------- -------- ------ ------
Increase (decrease) in net
assets from capital share
transactions (63,055) 38,678 4,887 2,703
--------- -------- ------ ------
Total increase (decrease) in
net assets (83,494) 47,750 4,302 2,806
Net Assets:
Beginning of period 273,973 226,223 2,806 --
--------- -------- ------ ------
End of period (including
undistributed net investment
income of $44, $26, $1 and
$0, respectively) $190,479 $273,973 $7,108 $2,806
========= ======== ====== ======
Number of Fund Shares:
Sold 10,547 13,947 1,141 283
Reinvested 1,231 759 22 3
Redeemed (18,108) (11,014) (668) (19)
--------- -------- ------ ------
Net increase (decrease) in
shares outstanding (6,330) 3,692 495 267
Shares Outstanding:
Beginning of period 25,740 22,048 267 --
--------- -------- ------ ------
End of period 19,410 25,740 762 267
========= ======== ====== ======
</TABLE>
See accompanying Notes to Financial Statements
63
<PAGE> 64
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, 1994
- --------------------------------------------------------------------------------
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. During 1993, the Trust elected to
change its fiscal year end from December 31 to August 31.
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 covering these
securities.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Bonds and notes are generally valued at prices obtained
from a 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 and 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.
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.
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.
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.
64
<PAGE> 65
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, 1994
- --------------------------------------------------------------------------------
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, 1994, (for financial reporting and federal income tax purposes),
net unrealized depreciation for the Schwab Short/Intermediate Government Bond
Fund aggregated $1,189,000, of which $376,000 related to appreciated securities
and $1,565,000 related to depreciated securities, and net unrealized
depreciation for the Schwab Long-Term Government Bond Fund aggregated $193,000,
of which $9,000 related to appreciated securities and $202,000 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
Government Bond Fund and the Schwab Long-Term Government Bond Fund incurred
investment advisory and administration fees of $993,000 and $19,000,
respectively, during the year ended August 31, 1994, 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, 1994, the Schwab Short/Intermediate Government
Bond Fund and the Schwab Long-Term Government Bond Fund incurred transfer agency
and shareholder service fees of $606,000 and $13,000, 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, 1994, 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 and expenses
aggregating $16,000 related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
During the year ended August 31, 1994, 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
reduced and expenses absorbed by the Investment Manager were $363,000 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 $134,000 and $13,000 for the Schwab Short/Intermediate Government
Bond Fund and the Schwab Long-Term Government Bond Fund, respectively.
65
<PAGE> 66
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1994, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
--------- ----------
<S> <C> <C>
Purchases $207,285 $11,112
Proceeds of sales and maturities $262,965 $ 5,890
</TABLE>
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate Schwab Long-Term
Government Bond Fund Government Bond Fund
------------------------------------------------------------------ -------------------------------
For the period For the period
For the November 5, 1991 March 5, 1993
For the eight month For the (commencement For the (commencement
year ended period ended year ended of operations) to year ended of operations) to
August 31, August 31, December 31, December 31, August 31, August 31,
1994 1993 1992 1991 1994 1993
----------- ------------ ------------ ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.64 $ 10.26 $ 10.28 $ 10.00 $10.53 $10.00
Income from Investment
Operations
Net investment income .54 .37 .60 .10 .60 .31
Net realized and unrealized
gain (loss) on investments (.71) .38 .01 .28 (1.20) .53
-------- -------- -------- ------- ------ ------
Total from investment
operations (.17) .75 .61 .38 (.60) .84
Less Distributions
Dividends from net
investment income (.54) (.37) (.60) (.10) (.60) (.31)
Distributions from realized
gain on investments (.12) -- (.03) -- -- --
-------- -------- -------- ------- ------ ------
Total distributions (.66) (.37) (.63) (.10) (.60) (.31)
-------- -------- -------- ------- ------ ------
Net asset value at end
of period $ 9.81 $ 10.64 $ 10.26 $ 10.28 $ 9.33 $10.53
======== ======== ======== ======= ====== ======
Total return (%) (1.67) 7.39 6.08 3.79 (5.80) 8.63
Ratios/Supplemental Data
Net assets, end of
period (000s) $190,479 $273,973 $226,223 $66,404 $7,108 $2,806
Ratio of expenses to
average net assets (%) .60 .60* .43 .35* .10 .26*
Ratio of net investment
income to average net
assets (%) 5.28 5.28* 5.78 6.14* 6.27 6.36*
Portfolio turnover rate (%) 91 107 185 4 123 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
Short/Intermediate Government Bond Fund for the periods ended August 31, 1994,
1993, December 31, 1992 and 1991 would have been .81%, .84%*, .89% and 1.47%*,
respectively, and the ratio of net investment income to average net assets would
have been 5.07%, 5.04%*, 5.32% and 5.02%*, respectively. With respect to the
Schwab Long-Term Government Bond Fund the ratio of expenses to average net
assets for the periods ended August 31, 1994 and 1993 would have been 2.19% and
19.19%*, respectively, and the ratio of net investment income to average net
assets would have been 4.18% and (12.57%)*, respectively.
* Annualized
66
<PAGE> 67
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of 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, 1994, the
results of each of their operations and the changes in each of their net assets
for each of 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 audits to obtain reasonable assuran
ce 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, 1994 by correspondence with the
custodian and broker, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
September 29, 1994
67
<PAGE> 68
- --------------------------------------------------------------------------------
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
--- -----
<S> <C> <C>
VARIABLE RATE
OBLIGATIONS--2.4%(a)
CALIFORNIA--2.2%
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds
(Southern California
Edison) Series 1986A
(VMIG1 A-1)
3.25%, 09/01/94 $ 900 $ 900
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds
(Southern California
Edison) Series 1986B
(VMIG1 A-1)
3.25%, 09/01/94 100 100
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds
(Southern California
Edison) Series 1986D
(VMIG1 A-1)
3.25%, 09/01/94 300 300
Irvine Ranch, California
Water District Consolidated
Refunding Bonds
Series 1985C /
(Sumitomo Bank SBPA)
(A-1 -)
3.10%, 09/01/94 100 100
-------
1,400
-------
MICHIGAN--0.2%
Midland County, Michigan
Economic Development
Authority (Dow Chemical
Project) Series A (- A-1)
3.50%, 09/01/94 100 100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $1,500) 1,500
-------
MUNICIPAL BONDS--97.6%(b)
ALASKA--1.8%
Anchorage, Alaska
Refunding Schedule Series A /
(MBIA Insurance)
(Aaa AAA)
5.10%, 08/01/99 1,145 1,151
-------
ARIZONA--10.3%
Arizona State Certificates of
Participation Series A /
(AMBAC Insurance)
(Aaa AAA)
4.00%, 11/01/97 4,500 4,421
Phoenix, Arizona
Civic Improvement Corp.
Wastewater Systems
Lease Revenue Bonds
(A1 A)
5.10%, 07/01/99 1,005 1,008
Phoenix, Arizona
Street and Highway Revenue
Refunding Bonds (A1 AA)
5.95%, 07/01/00 1,000 1,045
-------
6,474
-------
ARKANSAS--6.8%
North Little Rock, Arkansas
Electric System Revenue
Bonds (Murray Lock and
Dam Hydro-Electric
Project) / (Escrowed to
Maturity with Government
Securities) (Aaa AAA)
9.50%, 07/01/95 $4,000 $4,297
-------
CALIFORNIA--5.2%
California State Revenue
Anticipation Warrants
Series C / (Multiple Credit
Enhancements)
(VMIG1 SP-1)
5.75%, 04/25/96 3,200 3,251
-------
COLORADO--1.6%
Platte River, Colorado
Power Authority
Series BB (Aa A+)
5.125%, 06/01/00 1,020 1,028
-------
DISTRICT OF COLUMBIA--1.6%
District of Columbia
Refunding Bonds
Series A (Baa A-)
5.00%, 06/01/98 1,000 985
-------
HAWAII--1.6%
Maui County, Hawaii
General Obligation /
(FGIC Insurance) (Aaa AAA)
3.70%, 09/01/96 1,000 988
-------
ILLINOIS--3.6%
Illinois Health Facilities
Authority Revenue
Bonds (LaGrange
Memorial Hospital) /
(AMBAC Insurance)
(Aaa AAA)
5.00%, 05/15/00 1,130 1,120
Illinois Health Facilities
Authority Revenue
Bonds (OSF Healthcare
System) (A1 A+)
5.125%, 11/15/00 1,145 1,128
-------
2,248
-------
INDIANA--1.3%
Indiana University Revenue
Bonds (Student Fee)
Series J (A1 AA-)
4.00%, 08/01/97 800 792
-------
IOWA--2.2%
Le Claire, Iowa Electric
Revenue Bonds (- SP-1+)
4.125%, 09/01/96 1,495 1,482
-------
KENTUCKY--4.2%
Kentucky Housing Corp.
Housing Revenue Bonds
Series B (Aaa AAA)
4.45%, 07/01/00 1,000 973
Kentucky State Property
and Buildings Commission
Revenue Bonds
(Project 55) (AA+)
4.15%, 09/01/99 1,735 1,666
-------
2,639
-------
</TABLE>
68
<PAGE> 69
- --------------------------------------------------------------------------------
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
--- -----
<S> <C> <C>
MASSACHUSETTS--9.5%
Massachusetts Municipal
Wholesale Electric Company
Power Supply Systems
Revenue Bonds Series A /
(AMBAC Insurance)
(Aaa AAA)
5.50%, 07/01/00 $2,000 $ 2,038
Massachusetts State
General Obligation
Series A (A A+)
4.40%, 11/01/98 1,625 1,586
Massachusetts State
Health and Education Facilities
Authority Revenue Bonds
(Brigham and Womens
Hospital) Series E (Aa A+)
4.40%, 07/01/00 1,000 964
Massachusetts State
Housing Finance Authority
Series A (A1 A+)
4.60%, 04/01/97 1,500 1,498
-------
6,086
-------
MICHIGAN--1.7%
Michigan State Building
Authority Revenue Bonds
Series I (A AA-)
4.90%, 10/01/99 1,050 1,042
-------
MINNESOTA--1.7%
Minneapolis, Minnesota
Community Development
Agency Tax Increment
Revenue Bonds /
(MBIA Insurance)
(Aaa AAA)
7.00%, 09/01/00 1,000 1,105
-------
MISSOURI--0.8%
Missouri State Environmental
Improvement & Energy
Resources Authority
Water Pollution Control
Revenue Bonds
Series A (Aa -)
5.80%, 07/01/99 500 516
-------
NEW JERSEY--2.5%
Passaic Valley, New Jersey
Sewer Commissioners
Refunding Sewer
System Series D /
(AMBAC Insurance)
(Aaa AAA)
5.70%, 12/01/97 1,520 1,581
-------
NEW MEXICO--1.6%
New Mexico State Capital
Projects (Aa AA)
4.10%, 08/01/97 1,000 990
-------
NORTH CAROLINA--1.8%
North Carolina Municipal
Power Agency Revenue
Refunding Bonds
(Catawba Electric) (A A)
4.50%, 01/01/96 1,115 1,116
-------
OHIO--1.6%
Ohio State
General Obligation
Series R (Aa AA)
4.00%, 09/01/95 1,000 999
-------
PENNSYLVANIA--7.7%
Pennsylvania Intergovernmental
Cooperative Authority
Special Tax Revenue
Bonds (City of Philadelphia) /
(FGIC Insurance)
(Aaa AAA)
5.60%, 06/15/98 2,825 2,896
Philadelphia, Pennsylvania
General Obligation
State Notes Series A /
(FGIC Insurance)
(Aaa AAA)
4.60%, 05/15/99 2,000 1,958
-------
4,854
-------
SOUTH CAROLINA--10.7%
Anderson County, South Carolina
Hospital Facilities Revenue
Bonds (Anderson Area
Medical Center) /
(MBIA Insurance)
(Aaa AAA)
4.40%, 02/01/00 1,520 1,467
Charleston, South Carolina
Certificates of Participation
Public Improvement Project /
(AMBAC Insurance)
(Aaa AAA)
4.30%, 09/01/00 1,085 1,035
Greenville, South Carolina
Hospital System Hospital
Facilities Revenue Refunding
Series C (- AA-)
5.00%, 05/01/00 1,090 1,075
Myrtle Beach, South Carolina
Water & Sewer
Series 1993 /
(MBIA Insurance)
(Aaa AAA)
4.60%, 03/01/00 2,000 1,945
South Carolina State
Public Service Authority
Power/Electric Revenue
Bonds Series A (A1 A+)
5.60%, 07/01/00 1,200 1,233
-------
6,755
-------
TEXAS--7.2%
Houston, Texas Water
Conveyance System
Contract Certificates of
Participation Series E /
(AMBAC Insurance)
(Aaa AAA)
5.50%, 12/15/97 1,000 1,031
Tarrant County, Texas
Water Control Revenue
Improvement District
No.1 Water Revenue
Refunding Bonds (A1 AA)
4.25%, 03/01/00 1,000 954
</TABLE>
69
<PAGE> 70
- --------------------------------------------------------------------------------
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
--- -----
<S> <C> <C>
Texas Municipal Power
Agency Revenue
Refunding Bonds /
(MBIA Insurance)
(Aaa AAA)
6.25%, 09/01/97 $1,000 $ 1,063
Trinity River Authority, Texas
Regional Wastewater System
Revenue Refunding
Bonds Series A /
(AMBAC Insurance)
(Aaa AAA)
4.30%, 08/01/96 1,500 1,500
-------
4,548
-------
UTAH--2.3%
Intermountain Power Agency
Utah Power Supply Revenue
Bonds Series A (Aa AA-)
4.50%, 07/01/00 1,500 1,436
-------
WASHINGTON--8.3%
Washington State
Certificates of Participation
State Equipment
Series B (A A)
4.125%, 04/01/97 1,500 1,470
Washington State
General Obligation
Series R 1993B (Aa AA)
4.40%, 10/01/98 1,800 1,771
Washington State Public
Power Supply System
Revenue Bonds (Nuclear
Project #2) Series A
(Aa AA)
4.625%, 07/01/98 2,000 1,970
-------
5,211
-------
TOTAL MUNICIPAL BONDS
(Cost $62,415) 61,574
-------
TOTAL INVESTMENTS--100.0%
(Cost $63,915) $63,074
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
70
<PAGE> 71
- --------------------------------------------------------------------------------
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
--- -----
<S> <C> <C>
VARIABLE RATE
OBLIGATIONS--11.9%(a)
CALIFORNIA--4.8%
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds
(Shell Oil Corp. Project)
Series 1991A
(VMIG1 A-1+)
3.05%, 09/01/94 $ 400 $ 400
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds
(Shell Oil Corp.Project)
Series 1991C
(VMIG1 A-1+)
3.05%, 09/01/94 900 900
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds
(Southern California Edison)
Series 1986A
(VMIG1 A-1)
3.25%, 09/01/94 100 100
Irvine Ranch, California
Water District Consolidated
Refunding Bonds
Series 1985A /
(Sumitomo Bank SBPA)
(A-1 -)
3.10%, 09/01/94 200 200
Irvine Ranch, California
Water District Consolidated
Refunding Bonds
Series 1985B /
(Sumitomo Bank LOC)
(A-1 -)
3.10%, 09/01/94 300 300
Irvine Ranch, California
Water District Consolidated
Refunding Bonds
Series 1985C /
(Sumitomo Bank SBPA)
(A-1 -)
3.10%, 09/01/94 100 100
Irvine Ranch, California
Water District Consolidated
Refunding Bonds
Series 1991 /
(National Westminster LOC)
(VMIG1 A-1+)
3.10%, 09/01/94 100 100
-------
2,100
-------
GEORGIA--0.5%
Hapeville, Georgia
Development Authority
Industrial Development
Revenue Bonds /
(Swiss Bank LOC) (P-1 -)
3.25%, 09/01/94 200 200
-------
MICHIGAN--3.4%
Midland County, Michigan
Economic Development
Authority (Dow Chemical
Project) Series A (- A-1)
3.50%, 09/01/94 $200 $200
Midland County, Michigan
Economic Development
Authority (Dow Chemical
Project) Series B (- A-1)
3.40%, 09/01/94 1,300 1,300
-------
1,500
-------
NEW YORK--2.7%
New York City Municipal Water
Finance Authority Water
and Sewer System Revenue
Bonds Series 1994C /
(FGIC Insurance & FGIC SBPA)
(VMIG1 SP1+)
3.15%, 09/01/94 1,200 1,200
-------
WASHINGTON--0.5%
Washington State Housing
Finance Commission Non-
Profit Housing Revenue Bonds
(Emerald Heights Project) /
(Banque Paribas LOC) (- A-1)
3.30%, 09/01/94 200 200
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $5,200) 5,200
-------
MUNICIPAL BONDS--88.1%(b)
ALABAMA--2.2%
Alabama Water Pollution
Control Authority Revolving
Fund (Jefferson) Series A /
(AMBAC Insurance)
(Aaa AAA)
5.75%, 02/15/10 1,000 960
-------
ALASKA--5.4%
Kodiak Island Borough, Alaska
General Obligations
Series 1994A /
(AMBAC Insurance)
(Aaa AAA)
5.40%, 02/15/10 2,500 2,350
-------
CALIFORNIA--3.3%
San Francisco, California
Downtown Parking Corp.
Revenue Bonds (A -)
6.65%, 04/01/18 500 503
University of California
Certificates of Participation
(UCLA Central Chiller
Cogeneration Facilities)
(Aa -)
5.30%, 11/01/08 1,000 934
-------
1,437
-------
</TABLE>
71
<PAGE> 72
- --------------------------------------------------------------------------------
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
--- -----
<S> <C> <C>
CONNECTICUT--3.8%
Connecticut Housing Finance
Authority (Housing Mortgage
Finance Project) Series B1
(Aa AA)
7.55%, 11/15/08 $1,570 $ 1,650
-------
DISTRICT OF COLUMBIA--2.5%
District of Columbia
Revenue Refunding
Bonds Series C /
(Escrowed to Maturity
with Government
Securities) (Aaa AAA)
8.00%, 06/01/96 1,000 1,078
-------
FLORIDA--6.4%
Jacksonville, Florida
Electric Authority
Revenue Refunding
Bonds (St. John River)
Issue 2 Series 10
(Aa1 AA)
5.30%, 10/01/08 2,400 2,274
Tallahassee, Florida
Municipal Electric Revenue
Bonds Series 1992B
(Aa AA-)
6.20%, 10/01/12 500 504
-------
2,778
-------
GEORGIA--9.8%
Burke County, Georgia
Development Authority
Pollution Control
Revenue Bonds
(Georgia Power Co.)
Series 1989 (Aa -)
6.35%, 05/01/19 2,200 2,159
Effingham County, Georgia
Development Authority
Pollution Control
Revenue Bonds
(Savannah Electric &
Power Co.) (A1 A)
6.75%, 02/01/22 2,000 2,088
-------
4,247
-------
ILLINOIS--5.7%
Illinois Health Facilities
Authority (Rush Presbyterian
St. Lukes Medical Center) /
(MBIA Insurance)
(Aaa AAA)
5.25%, 11/15/20 1,000 861
Illinois State Dedicated Tax
Revenue Bonds
Civic Center /
(AMBAC Insurance)
(Aaa AAA)
6.25%, 12/15/20 500 506
Illinois State Toll Highway
Authority (Toll Highway
Priority Revenue)
Series A (A1 A+)
6.375%, 01/01/15 1,100 1,108
-------
2,475
-------
INDIANA--2.3%
Indiana Health Facility
Financing Authority
Refunding Bonds (Floyd
Memorial Hospital) (- A)
6.625%, 02/15/22 $1,000 $1,005
-------
IOWA--2.4%
Ames, Iowa
Hospital Revenue Bonds
(Mary Greeley Medical Center
Project) Series 1993 /
(AMBAC Insurance)
(Aaa AAA)
5.70%, 08/15/12 500 478
Cedar Rapids, Iowa
Hospital Revenue Bonds
(St. Luke's Methodist
Project) Series 1993 /
(FGIC Insurance)
(Aaa AAA)
6.125%, 08/15/13 600 582
-------
1,060
-------
MARYLAND--2.3%
Maryland State Health &
Higher Education Authority
Revenue Bonds /
(MBIA Insurance)
(Aaa AAA)
6.125%, 07/01/14 1,000 999
-------
MASSACHUSETTS--4.0%
Massachusetts State
Health and Educational
Authority (Brigham and
Womens Hospital)
Series E (Aa A+)
5.10%, 07/01/07 1,000 931
Massachusetts State
Housing Finance Agency
(Multi Family Residential
Housing Revenue
FHA Section 8)
Series A (A A+)
7.80%, 08/01/22 800 828
-------
1,759
-------
MICHIGAN--4.7%
Farmington Hills, Michigan
Hospital Finance Authority
(Botsford General Hospital)
Series A / (MBIA Insurance)
(Aaa AAA)
6.50%, 02/15/22 1,000 1,035
Michigan State Building
Authority Revenue Bonds
Series II (A AA-)
6.25%, 10/01/20 1,000 991
-------
2,026
-------
</TABLE>
72
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- --------------------------------------------------------------------------------
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR VALUE
--- -----
<S> <C> <C>
MISSOURI--4.3%
Kansas City, Missouri
(Elementary School
School District
Project) Series 93D /
(FGIC Insurance)
(Aaa AAA)
5.15%, 02/01/08 $1,000 $ 938
Kansas City, Missouri
School District Building
Corp. (Capital Improvement
Project) Series 1993 /
(FGIC Insurance)
(Aaa AAA)
5.15%, 02/01/08 1,000 938
-------
1,876
-------
NEW HAMPSHIRE--1.6%
New Hampshire Higher Education
and Health Facilities Authority
Revenue Bonds (Mary
Hitchcock Memorial Hospital)
Series 1985 A-G /
(FGIC Insurance)
(Aaa AAA)
5.25%, 08/15/08 750 707
-------
NORTH CAROLINA--3.1%
North Carolina Catawba
Municipal Power Agency
Revenue Bonds (A A)
6.25%, 01/01/17 1,350 1,338
-------
PENNSYLVANIA--5.6%
Lehigh County, Pennsylvania
Industrial Development Authority
Pollution Control Revenue Bonds
Series A / (MBIA Insurance)
(Aaa AAA)
6.40%, 11/01/21 1,500 1,513
Philadelphia, Pennsylvania
Hospitals and Higher Education
Facilities Authority Revenue
Refunding Bonds (Childrens
Hospital) (Aa AA)
5.25%, 02/15/08 1,000 930
-------
2,443
-------
RHODE ISLAND--2.3%
Rhode Island Housing and
Mortgage Financing Corp.
Series 10A (Aa AA+)
6.50%, 10/01/22 $1,000 $1,005
-------
SOUTH CAROLINA--3.3%
Piedmont, South Carolina
Municipal Power Agency
Electric Revenue Bonds
Series 1985B /
(MBIA Insurance)
(Aaa AAA)
6.20%, 01/01/08 1,400 1,451
-------
TEXAS--6.9%
Houston, Texas
Water and Sewer System
Prior Lien Revenue
Refunding Bonds
Series 1992B (A A)
6.375%, 12/01/14 1,000 1,010
San Antonio, Texas
Electric and Gas Series
1992 (Aa1 AA)
5.75%, 02/01/11 1,000 959
University of Texas
University Revenue Bonds
Series B (Aa AA)
6.75%, 08/15/13 1,000 1,058
-------
3,027
-------
VIRGINIA--1.1%
Virginia College Building
Authority (Washington and
Lee University Project)
Series 1994 (Aa AA)
5.75%, 01/01/14 500 485
-------
WASHINGTON--5.1%
Seattle, Washington
Municipal Light and Power
Revenue Refunding Bonds
(Aa AA)
5.40%, 05/01/08 2,300 2,200
-------
TOTAL MUNICIPAL BONDS
(Cost $39,027) 38,356
-------
TOTAL INVESTMENTS--100.0%
(Cost $44,227) $43,556
=======
</TABLE>
73
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- --------------------------------------------------------------------------------
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
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, 1994. 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, 1994. Dates
shown represent the later of the demand date or next interest rate change
date, which is considered the maturity date for financial reporting
purposes.
(b) Interest rates represent coupon rate of security.
Abbreviations
- -------------
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance Corporation
SBPA Standby Purchase Agreement
VMIG Variable Moody's Investment Guide
See accompanying Notes to Financial Statements.
74
<PAGE> 75
- --------------------------------------------------------------------------------
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENT OF ASSETS AND LIABILITIES (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $63,915 and $44,227, respectively) $63,074 $43,556
Cash 86 48
Interest receivable 840 485
Receivable for fund shares sold 131 7
Deferred organization costs 60 50
Prepaid expenses 6 5
------- -------
Total assets 64,197 44,151
------- -------
LIABILITIES
Payable for:
Dividends 39 36
Fund shares redeemed 133 34
Deferred organization costs 70 74
Investment advisory and administration fee 8 7
Transfer agency and shareholder service fees 10 --
Other 48 25
------- -------
Total liabilities 308 176
------- -------
Net assets applicable to outstanding shares $63,889 $43,975
======= =======
NET ASSETS CONSIST OF:
Capital paid in $64,962 $44,644
Accumulated undistributed
net investment income 7 9
Accumulated net realized loss
on investments sold (239) (7)
Net unrealized depreciation
on investments (841) (671)
------- -------
$63,889 $43,975
======= =======
THE PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 6,443 4,421
Net asset value, offering and
redemption price per share $9.92 $9.95
</TABLE>
See accompanying Notes to Financial Statements.
75
<PAGE> 76
- --------------------------------------------------------------------------------
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENT OF OPERATIONS (in thousands)
For the year ended August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
Interest income $ 2,808 $ 2,653
-------- --------
Expenses:
Investment advisory and
administration fee 275 195
Transfer agency and
shareholder service fees 168 119
Custodian fees 59 54
Registration fees 22 32
Professional fees 31 30
Shareholder reports 18 15
Trustees' fees 3 3
Amortization of deferred organization costs 14 17
Insurance and other expenses 17 7
-------- --------
607 472
Less expenses reduced (287) (227)
-------- --------
Total expenses incurred by Fund 320 245
-------- --------
Net investment income 2,488 2,408
-------- --------
Net realized gain (loss) on investments:
Proceeds from sales of investments 62,985 82,195
Cost of investments sold (63,250) (81,909)
-------- --------
Net realized gain (loss) on
investments sold (265) 286
-------- --------
Change in net unrealized appreciation
(depreciation) on investments:
Beginning of period 681 2,280
End of period (841) (671)
-------- --------
Decrease in net unrealized
appreciation on investments (1,522) (2,951)
-------- --------
Net increase (decrease) in net assets
resulting from operations $ 701 $ (257)
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
76
<PAGE> 77
- --------------------------------------------------------------------------------
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Short/Intermediate Schwab Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
----------------------------------- ------------------------------------
For the period
April 21, 1993 For the
For the (commencement For the eight month
year ended of operations) to year ended period ended
August 31, 1994 August 31, 1993 August 31, 1994 August 31, 1993
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,488 $ 583 $ 2,408 $ 1,482
Net realized gain (loss) on
investments sold (265) 26 286 454
Increase (decrease) in net
unrealized appreciation
on investments (1,522) 681 (2,951) 2,021
-------- ------- -------- --------
Net increase (decrease) in
net assets resulting from
operations 701 1,290 (257) 3,957
-------- ------- -------- --------
Distributions to shareholders from:
Net investment income (2,485) (579) (2,404) (1,477)
Capital gains -- -- (371) --
-------- ------- -------- --------
Total distributions to
shareholders (2,485) (579) (2,775) (1,477)
-------- ------- -------- --------
Capital Share Transactions:
Proceeds from shares sold 50,244 58,668 28,434 36,988
Net asset value of shares
issued in reinvestment of
dividends 1,957 433 2,069 1,208
Less payments for shares
redeemed (40,978) (5,362) (33,909) (18,297)
-------- ------- -------- --------
Increase (decrease) in net
assets from capital share
transactions 11,223 53,739 (3,406) 19,899
-------- ------- -------- --------
Total increase (decrease) in
net assets 9,439 54,450 (6,438) 22,379
Net Assets:
Beginning of period 54,450 -- 50,413 28,034
-------- ------- -------- --------
End of period (including
undistributed net investment
income of $7, $4, $9 and
$5, respectively) $ 63,889 $54,450 $ 43,975 $ 50,413
======== ======= ======== ========
Number of Fund Shares:
Sold 4,963 5,855 2,769 3,601
Reinvested 195 43 200 118
Redeemed (4,079) (534) (3,311) (1,781)
-------- ------- -------- --------
Net increase (decrease) in
shares outstanding 1,079 5,364 (342) 1,938
Shares Outstanding:
Beginning of period 5,364 -- 4,763 2,825
-------- ------- -------- --------
End of period 6,443 5,364 4,421 4,763
======== ======= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
77
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- --------------------------------------------------------------------------------
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1994
- --------------------------------------------------------------------------------
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. During 1993, the Trust elected to
change its year end from December 31 to August 31.
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 a 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.
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.
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.
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.
78
<PAGE> 79
- --------------------------------------------------------------------------------
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1994, (for financial reporting and federal income tax purposes),
net unrealized depreciation for the Schwab Short/Intermediate Tax-Free Bond Fund
aggregated $841,000, of which $80,000 related to appreciated securities and
$921,000 related to depreciated securities, and net unrealized depreciation for
the Schwab Long-Term Tax-Free Bond Fund aggregated $671,000, of which $176,000
related to appreciated securities and $847,000 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 $275,000 and $195,000,
respectively, during the year ended August 31, 1994, 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, 1994, 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 $168,000 and $119,000, 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, 1994, 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 and expenses
aggregating $6,000 related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
During the year ended August 31, 1994, 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 $183,000 and $117,000 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 $104,000 and $110,000 for
the Schwab Short/Intermediate Tax-Free Bond Fund and the Schwab Long-Term
Tax-Free Bond Fund, respectively.
79
<PAGE> 80
- --------------------------------------------------------------------------------
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1994
- --------------------------------------------------------------------------------
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1994, 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 $27,719 $27,835
Proceeds of sales and maturities $11,785 $38,195
</TABLE>
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate Schwab Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------------------- ------------------------------------------------
For the period For the period
April 21, 1993 For the September 11, 1992
For the (commencement For the eight month (commencement
year ended of operations) to year ended period ended of operations) to
August 31, August 31, August 31, August 31, December 31,
1994 1993 1994 1993 1992
---------- ----------------- ---------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $10.15 $10.00 $10.59 $9.92 $10.00
Income from Investment Operations
Net investment income .37 .13 .52 .36 .17
Net realized and unrealized
gain (loss) on investments (.23) .15 (.56) .67 (.08)
------- ------- ------- ------- -------
Total from investment operations .14 .28 (.04) 1.03 .09
Less Distributions
Dividends from net
investment income (.37) (.13) (.52) (.36) (.17)
Distributions from realized
gain on investments -- -- (.08) -- --
------- ------- ------- ------- -------
Total distributions (.37) (.13) (.60) (.36) (.17)
------- ------- ------- ------- -------
Net asset value at end of period $9.92 $10.15 $9.95 $10.59 $9.92
======= ======= ======= ======= =======
Total return (%) 1.42 2.83 (.42) 10.56 .92
Ratios/Supplemental Data
Net assets, end of period (000s) $63,889 $54,450 $43,975 $50,413 $28,034
Ratio of expenses to average
net assets (%) .48 .45* .51 .45* .45*
Ratio of net investment income
to average net assets (%) 3.71 3.63* 5.05 5.30* 5.61*
Portfolio turnover rate (%) 19 11 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
Short/Intermediate Tax-Free Bond Fund for the periods ended August 31, 1994 and
1993 would have been .91% and 1.26%*, respectively, and the ratio of net
investment income to average net assets would have been 3.28% and 2.82%*,
respectively. With respect to the Schwab Long-Term Tax-Free Bond Fund the ratio
of expenses to average net assets for the periods ended August 31, 1994, 1993
and December 31, 1992 would have been .99%, 1.18%* and 1.53%*, respectively, and
the ratio of net investment income to average net assets would have been 4.57%,
4.57%* and 4.53%*, respectively.
* Annualized
80
<PAGE> 81
- --------------------------------------------------------------------------------
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of 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, 1994, the
results of each of their operations and the changes in each of their net assets
for each of 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 audits 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, 1994 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 29, 1994
81
<PAGE> 82
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
VARIABLE RATE
OBLIGATIONS--6.0%(a)
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds
(Shell Oil Corp. Project)
Series 1991A
(VMIG1 A-1+)
3.05% 09/01/94 $ 100 $ 100
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds
(Southern California Edison)
Series 1986A
(VMIG1 A-1)
3.25% 09/01/94 100 100
Irvine Ranch, California
Water District Consolidated
Refunding Bonds
Series 1985A/
(Sumitomo Bank SBPA)
(A-1 -)
3.10% 09/01/94 100 100
Irvine Ranch, California
Water District Numbers
140,240,105,250 /
(Bank of America LOC)
(VMIG1 A-1)
2.85% 09/01/94 600 600
Newport Beach, California
Health Facilities
Financing Authority
Revenue Bonds
(Hoag Memorial Hospital
Presbyterian Project) /
(Credit Suisse SBPA)
(VMIG1 -)
3.05% 09/01/94 1,000 1,000
Orange County, California
Limited Obligation
Improvement Board
Irvine Coast Assessment
District 88-1 / (Multiple
Credit Enhancements)
(VMIG1 A-1)
2.90% 09/01/94 1,000 1,000
------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $2,900) 2,900
------
MUNICIPAL BONDS--94.0%(b)
Antioch Area, California
Public Facility Financing
Agency Revenue Bonds
(California Special Tax 89 1) /
(FGIC Insurance) (Aaa AAA)
4.50% 08/01/00 1,320 1,277
Bakersfield, California
Hospital Revenue Bonds
(Adventist Health
Systems/West) /
(MBIA Insurance)
(Aaa AAA)
4.50% 03/01/99 200 197
4.75% 03/01/00 300 295
4.90% 03/01/01 500 492
Beverly Hills, California
Public Financing
Authority Lease
Revenue Bonds Series A
(A1 AA-)
4.40% 06/01/98 $1,300 $1,281
California Educational
Facilities Authority
Revenue Bonds
(University of Santa Clara)
(A1 -)
4.65% 09/01/99 1,420 1,390
California Health Facilities
Financing Authority
Revenue Bonds
(Catholic Healthcare
West 1994) Series A /
(MBIA Insurance)
(Aaa AAA)
4.25% 07/01/00 3,010 2,860
California Health Facilities
Financing Authority
Revenue Bonds
(Catholic Healthcare
West 1994) Series B /
(AMBAC Insurance)
(Aaa AAA)
4.25% 07/01/00 800 757
California Health Facilities
Financing Authority
Revenue Bonds
(Downey Community
Hospital) (- A-)
4.75% 05/15/99 2,220 2,165
California Housing Finance
Authority Home
Mortgage Series B
(Aa A+)
3.85% 08/01/96 1,445 1,422
California State Public
Works Board Lease
Revenue Bonds
(Department of
Corrections California
State Prison-Susanville)
Series D (A A-)
4.40% 06/01/00 1,000 943
California State Public
Works Board Lease
Revenue Bonds
(University of California
Projects) Series A
(A A-)
4.70% 06/01/00 1,020 977
California State Public
Works Board Lease
Revenue Bonds
(Various California State
University Projects)
Series A /
(AMBAC Insurance)
(A A-)
4.30% 12/01/99 2,000 1,913
</TABLE>
82
<PAGE> 83
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
California State Public
Works Board Lease
Revenue Refunding Bonds
(Department of Corrections
State Prison) Series A /
(AMBAC Insurance)
(Aaa AAA)
4.70% 12/01/00 $2,000 $1,943
California State Public
Works Board Lease
Revenue Refunding Bonds
(Various California
Community College Projects)
Series 1993A
(A A-)
4.70% 12/01/99 1,000 974
California State Revenue
Anticipation Warrants
Series C / (Multiple
Credit Enhancements)
(VMIG1 SP-1)
5.75% 04/25/96 2,300 2,337
California State Various
Purpose General
Obligations (A1 A)
4.00% 10/01/95 1,100 1,100
California Statewide
Communities
Development Authority
Revenue Bonds
(Cedars-Sinai Medical
Center) (Aa -)
4.40% 11/01/00 1,235 1,183
Foothill, California
Transit Zone Referendum
Certificates of Participation
Series A (Baa1 -)
4.50% 05/01/97 1,000 980
4.50% 11/01/97 1,000 976
Garden Grove, California
Community Development
Tax Allocation
Refunding Bonds (- A)
4.70% 10/01/98 1,060 1,032
Industry, California
General Obligation
Refunding Bonds /
(MBIA Insurance)
(Aaa AAA)
5.00% 07/01/97 1,100 1,114
Los Angeles County, California
Metropolitan Transportation
Authority Sales Tax
Revenue Bonds
Series A (A1 A+)
4.50% 07/01/98 1,100 1,090
Los Angeles County, California
Public Works
Financing Authority
Capital Construction and
Refunding Bonds
(Los Angeles County Flood
Control District)
(Aa1 AA-)
4.30% 03/01/00 1,090 1,042
Los Angeles County, California
Transportation Commission
Certificates of Participation
Series B (A1 A+)
4.75% 07/01/95 $ 675 $ 678
Los Angeles, California
State Building Authority
Lease Revenue Refunding
Bonds (California
Department of General
Services) Series A (A A-)
4.50% 05/01/98 400 393
4.70% 05/01/99 450 440
Morgan Hill, California
Unified School District
Certificates of Participation
(A1 -)
4.80% 08/01/99 510 493
Northern California
Power Agency Public
Power Revenue Refunding
Bonds (Geothermal
Project No. 3)
Series A (A A-)
4.60% 07/01/98 1,300 1,284
Northern California
Power Agency Public
Power Revenue Refunding
Bonds (Hydroelectric
Project No.1) Series A /
(MBIA Insurance)
(Aaa AAA)
4.90% 07/01/96 645 653
Pasadena, California
Certificates of Participation
Referendum and
Capital Projects /
(AMBAC Insurance)
(Aaa AAA)
4.25% 02/01/00 1,035 991
Redding, California
Electric System Revenue
Certificates of Participation
Series A /
(FGIC Insurance)
(Aaa AAA)
4.60% 06/01/99 625 616
Riverside County, California
Transportation Commission
Sales Tax Revenue Bonds
Series A (A A+)
4.10% 06/01/95 1,300 1,305
San Diego County, California
Water Authority Water Revenue
Certificates of Participation
Series A (Aa AA-)
4.10% 05/01/95 1,000 1,001
</TABLE>
83
<PAGE> 84
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
San Francisco, California
Port Committee Revenue
Refunding Bonds (Marine
Terminals) (A BBB+)
5.00% 07/01/00 $2,000 $ 1,983
San Ramon Valley, California
Unified School District
Certificates of Participation
(Measure A Capital Project)
Series A (A -)
4.90% 10/01/99 1,100 1,077
Simi Valley, California
Public Finance Authority
Revenue Bonds /
(MBIA Insurance)
(Aaa AAA)
4.10% 09/01/97 500 494
4.30% 09/01/98 500 493
Southern California Public
Power Authority
(Southern Transmission
Project) (Aa AA-)
4.75% 07/01/97 1,100 1,104
Stockton, California
Health Facilities Revenue
Bonds (St. Joseph
Medical Center) Series A /
(MBIA Insurance)
(Aaa AAA)
4.50% 06/01/99 $ 500 $ 489
4.60% 06/01/00 600 580
University of California
Board of Regents
(Multiple Purpose Projects)
Series 1991A (A A-)
5.10% 09/01/94 200 200
University of California
Certificates of Participation
(UCLA Central Chiller
Cogeneration Facilities) (Aa -)
6.20% 11/01/00 1,100 1,178
-------
TOTAL MUNICIPAL BONDS
(Cost $46,085) 45,192
-------
TOTAL INVESTMENTS--100.0%
(Cost $48,985) $48,092
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
84
<PAGE> 85
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--5.1%(a)
California Pollution Control
Financing Authority
Pollution Control
Revenue Bonds
(Shell Oil Corp. Project)
Series 1991A
(VMIG1 A-1+)
3.05%, 09/01/94 $2,600 $2,600
California Pollution Control
Financing Authority
Pollution Control
Revenue Bonds
(Southern California
Edison) Series 1986D
(VMIG1 A-1)
3.25%, 09/01/94 100 100
California Pollution Control
Financing Authority
Resource Recovery
Revenue Bonds (Burney
Forest Products Project)
Series A / (National
Westminster LOC) (P-1 -)
2.90%, 09/01/94 800 800
Irvine Ranch, California
Water District
Consolidated Refunding
Bonds Series 1985A /
(Sumitomo Bank SBPA)
(A-1 -)
3.10%, 09/01/94 100 100
Irvine Ranch, California
Water District
Consolidated Refunding
Bonds Series 1985C /
(Sumitomo Bank SBPA)
(A-1 -)
3.10%, 09/01/94 300 300
Irvine, California
Apartment Development
Revenue Bonds (San Rafael
Apartments Project)
Series 1992A /
(Sumitomo Bank LOC)
(VMIG1 A-1)
2.90%, 09/01/94 500 500
Orange County, California
Certificates of Participation
(Office and Courthouse Project) /
(Dai-Ichi Kangyo Bank LOC)
(A1 -)
3.10%, 09/01/94 100 100
Orange County, California
Limited Obligation
Improvement Board
Irvine Coast Assessment
District 88-1 / (Multiple
Credit Enhancements)
(VMIG1 A-1)
2.90%, 09/01/94 800 800
------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $5,300) 5,300
------
MUNICIPAL BONDS--94.9%(b)
Alameda County, California
Certificates of Participation
Capital Projects (A A+)
6.25%, 06/01/06 $1,000 $1,006
6.75%, 06/01/16 600 614
Antioch Area, California
Public Facilities
Financing Agency
Special Tax Series 89-1 /
(FGIC Insurance)
(Aaa AAA)
5.25%, 08/01/07 1,985 1,906
5.35%, 08/01/08 2,040 1,964
Bakersfield, California
Hospital Revenue Bonds
(Bakersfield Memorial
Hospital) Series A (A A)
6.50%, 01/01/22 1,000 974
Beverly Hills, California
Public Financing
Authority Lease Revenue
Refunding Bonds Series A /
(MBIA Insurance)
(Aaa AAA)
5.40%, 06/01/08 1,180 1,134
California Educational
Facilities Authority
Revenue Bonds (Loyola
Marymount University)
Series A (A1 -)
6.00%, 10/01/14 1,400 1,363
California Educational
Facilities Authority
Revenue Bonds (Loyola
Marymount University)
Series B (A1 -)
6.60%, 10/01/22 1,450 1,484
California Educational
Facilities Authority
Revenue Bonds
(Mills College) (Baa1 -)
6.875%, 09/01/22 500 499
California Educational
Facilities Authority
Revenue Bonds (Saint
Mary's College) (A -)
5.00%, 10/01/12 3,000 2,591
California Educational
Facilities Authority
Revenue Bonds (Santa
Clara University) (A1 -)
5.75%, 09/01/18 3,255 3,043
</TABLE>
85
<PAGE> 86
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
California Health Facilities
Financing Authority
Revenue Bonds
(Association of Retarded
Citizens) / (California
Mortgage Insurance) (- A)
7.00%, 05/01/21 $ 455 $ 479
California Health Facility
for Marshall Hospital
Series A / (California
Mortgage Insurance) (- A)
6.625%, 11/01/22 4,000 4,040
California Housing Finance
Authority Multi Unit
Housing Revenue Bonds
BII Series 1992 (A1 A+)
6.70%, 08/01/15 1,000 1,024
California State Public
Works Board Lease
Revenue Bonds
(Various California State
University Projects)
Series A (A A-)
6.70%, 10/01/17 1,250 1,270
California State Public
Works Board Lease
Revenue Bonds (Various
University of California
Projects) Series A (A A-)
5.50%, 06/01/10 2,000 1,828
California State Revenue
Anticipation Warrants
Series C / (Multiple
Credit Enhancements)
(VMIG1 SP-1)
5.75%, 04/25/96 2,600 2,642
California Statewide
Communities Development
Authority Hospital
Revenue Bonds
(Cedars-Sinai Medical Center)
Series 1992 (Aa -)
6.50%, 08/01/15 1,250 1,280
California Statewide
Communities Development
Authority Revenue Bonds
(Sutter Health Obligated Group) /
(AMBAC Insurance)
(Aaa AAA)
6.00%, 08/15/09 1,000 998
Central Coast Water Authority
(State Water Project
Regional Facilities) /
(AMBAC Insurance)
(Aaa AAA)
6.60%, 10/01/22 1,500 1,545
Chico, California
Unified School District
General Obligations
Series C /
(MBIA Insurance)
(Aaa AAA)
6.75%, 06/01/17 500 526
Chino Basin, California
Regional Financing
Authority Municipal
Water District Sewer
System Project
Revenue Bonds /
(AMBAC Insurance)
(Aaa AAA)
6.00%, 08/01/16 $2,800 $2,755
East Bay, California
Municipal Utilities District
Water System Revenue
Refunding Bonds (A1 AA-)
6.00%, 06/01/12 3,500 3,469
Folsom County, California
Public Financing
Authority Lease Revenue
Bonds Series 1992 /
(AMBAC Insurance)
(Aaa AAA)
6.00%, 10/01/12 1,000 996
Fresno, California
Health Facility Revenue
Bonds (Holy Cross Health
System - St. Agnes
Medical Center) (A1 AA-)
6.50%, 06/01/11 550 559
Los Angeles County, California
Lease Revenue Bonds
(Capital Asset Leasing Corp.) /
(AMBAC Insurance)
(Aaa AAA)
6.00%, 12/01/16 2,750 2,705
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 1,848
Los Angeles County, California
Transportation Commission
Sales Tax Revenue Refunding
Bonds Proposition C
Second Series - Series A /
(MBIA Insurance)
(Aaa AAA)
6.25%, 07/01/13 6,000 6,060
Los Angeles County, California
Transportation Commission
Sales Tax Revenue
Refunding Bonds
Series B (A1 A+)
6.50%, 07/01/13 555 567
Los Angeles, California
Department of Water
and Power Electric Plant
Revenue Bonds (Aa AA)
6.00%, 01/15/11 865 857
</TABLE>
86
<PAGE> 87
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
Los Angeles, California
Wastewater System
Revenue Bonds Series B /
(AMBAC Insurance)
(Aaa AAA)
6.25%, 06/01/12 $3,260 $3,301
Los Angeles, California
Wastewater System
Revenue Bonds Series D /
(FGIC Insurance)
(Aaa AAA)
6.00%, 11/01/14 2,500 2,466
Northern California Power
Agency Multiple Capital
Facilities Revenue
Bonds Series A /
(MBIA Insurance)
(Aaa AAA)
6.50%, 08/01/12 3,300 3,420
Northern California Power
Agency Public Power
Revenue Refunding
Bonds (Hydroelectric
Project No. 1) Series A /
(MBIA Insurance)
(Aaa AAA)
6.25%, 07/01/12 2,000 2,035
Oceanside, California
Certificates of Participation
Refunding Bonds
Series A (A -)
6.375%, 04/01/12 1,250 1,222
Orange County, California
Water District
Certificates of Participation
(Aa AA)
6.50%, 08/15/11 1,150 1,180
Petaluma, California
Certificates of Participation
Series A /
(AMBAC Insurance)
(Aaa AAA)
5.50%, 08/01/08 750 725
Sacramento County, California
Sanitation District
Financing Authority
Revenue Bonds
(Aa AA)
5.125%, 12/01/13 1,000 871
Sacramento, California
Certificates of Participation
(Light Rail Transportation
Project) (A1 A+)
6.75%, 07/01/07 2,000 2,145
Sacramento, California
Regional Transit
Finance Corp.
Certificates of Participation
Series 1992A (A1 -)
6.375%, 03/01/05 250 258
San Bernardino County,
California - Alta Loma
Elementary School
General Obligation Bonds /
(AMBAC Insurance)
(Aaa AAA)
5.875%, 06/01/08 $ 840 $ 840
5.875%, 06/01/09 860 851
San Bernardino County,
California Certificates of
Participation (West
Valley Detention Center) /
(MBIA Insurance)
(Aaa AAA)
6.50%, 11/01/12 420 433
San Diego, California
Industrial Development
Revenue Bonds
(San Diego Gas & Electric)
Series A (Aa3 A+)
5.90%, 06/01/18 4,945 4,692
San Francisco, Calfornia
Port Commission
Revenue Refunding
Bonds (A BBB+)
5.90%, 07/01/09 5,000 4,738
San Francisco, California
City and County (Library
Facilities Project)
Series D (A1 AA-)
5.75%, 06/15/12 685 659
Santa Clara Valley, California
Water District
Certificates of Participation
(Public Facility Project)
(A1 AA-)
6.60%, 02/01/14 475 512
Santa Clara, California
Redevelopment Agency
Tax Allocation (Bayshore
North Project) /
(AMBAC Insurance)
(Aaa AAA)
7.00%, 07/01/10 1,500 1,682
Santa Monica, California
Wastewater Enterprise
Revenue Bonds
(Hyperion Project)
Series A (A1 A+)
6.25%, 01/01/11 1,250 1,272
Southern California Public
Power Authority
(San Juan Unit 3)
Power Revenue Bonds
Series A / (MBIA Insurance)
(Aaa AAA)
5.375%, 01/01/08 5,000 4,794
Southern California
Rapid Transit District
Certificates of Participation
(Workers Compensation Fund) /
(MBIA Insurance)
(Aaa AAA)
6.00%, 07/01/10 1,500 1,506
</TABLE>
87
<PAGE> 88
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
Southern California
Rapid Transit District
Revenue Bonds /
(AMBAC Insurance)
(Aaa AAA)
6.00%, 09/01/08 $3,500 $ 3,544
Temecula, California
Community Services
District Certificates of
Participation (Community
Recreation Center
Project) (- A)
7.125%, 10/01/12 1,000 1,015
Westminster, California
Public Financing
Authority Bonds (1994
Civic Center and Street
Improvement Project)
(- A-)
7.00%, 06/01/19 $3,325 $ 3,404
--------
TOTAL MUNICIPAL BONDS
(Cost $100,103) 99,591
--------
TOTAL INVESTMENTS--100.0%
(Cost $105,403) $104,891
========
</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, 1994. 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,
1994. Dates shown represent the later of the demand date or next interest
rate change date, which is considered the maturity date for financial
reporting purposes.
(b) Interest rates represent coupon rate of security.
Abbreviations
- -------------
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
SBPA Standby Purchase Agreement
VMIG Variable Moody's Investment Grade
See accompanying Notes to Financial Statements.
88
<PAGE> 89
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENT OF ASSETS AND LIABILITIES (in thousands)
August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $48,985 and $105,403, respectively) $48,092 $104,891
Cash 74 80
Interest receivable 561 1,530
Receivable for fund shares sold 22 135
Deferred organization costs 4 5
Prepaid expenses 2 3
------- --------
Total assets 48,755 106,644
------- --------
LIABILITIES
Payable for:
Dividends 31 90
Fund shares redeemed 29 51
Investment advisory and administration fee 7 23
Transfer agency and shareholder service fees 10 22
Other 29 26
------- --------
Total liabilities 106 212
------- --------
Net assets applicable to outstanding shares $48,649 $106,432
======= ========
NET ASSETS CONSIST OF:
Capital paid in $49,605 $107,768
Accumulated undistributed
net investment income 6 23
Accumulated net realized loss
on investments sold (69) (847)
Net unrealized depreciation
on investments (893) (512)
------- --------
$48,649 $106,432
======= ========
THE PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 4,919 10,231
Net asset value, offering and redemption
price per share $9.89 $10.40
</TABLE>
See accompanying Notes to Financial Statements.
89
<PAGE> 90
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENT OF OPERATIONS (in thousands)
For the year ended August 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
<S> <C> <C>
Interest income $ 2,184 $ 6,944
-------- --------
Expenses:
Investment advisory and
administration fee 214 498
Transfer agency and
shareholder service fees 131 304
Custodian fees 56 91
Professional fees 28 32
Shareholder reports 7 23
Trustees' fees 4 8
Amortization of deferred organization costs 1 1
Insurance and other expenses 8 19
-------- --------
449 976
Less expenses reduced (196) (247)
-------- --------
Total expenses incurred by Fund 253 729
-------- --------
Net investment income 1,931 6,215
-------- --------
Net realized gain (loss) on investments:
Proceeds from sales of investments 59,022 151,223
Cost of investments sold (59,091) (151,626)
-------- --------
Net realized loss on investments sold (69) (403)
-------- --------
Change in net unrealized appreciation
(depreciation) on investments:
Beginning of period 494 7,322
End of period (893) (512)
-------- --------
Decrease in net unrealized
appreciation on investments (1,387) (7,834)
-------- --------
Net increase (decrease) in net assets
resulting from operations $ 475 ($ 2,022)
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
90
<PAGE> 91
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Short/Intermediate Schwab California Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------------------------ ------------------------------------
For the period
April 21, 1993 For the
For the (commencement For the eight month
year ended of operations) to year ended period ended
August 31, 1994 August 31, 1993 August 31, 1994 August 31, 1993
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,931 $ 438 $ 6,215 $ 3,946
Net realized gain (loss) on
investments sold (69) -- (403) 1,460
Increase (decrease) in net
unrealized appreciation
on investments (1,387) 494 (7,834) 5,211
-------- ------- -------- --------
Net increase (decrease) in
net assets resulting from
operations 475 932 (2,022) 10,617
-------- ------- -------- --------
Distributions to shareholders from:
Net investment income (1,928) (435) (6,205) (3,933)
Capital gains -- -- (1,427) --
-------- ------- -------- --------
Total distributions to
shareholders (1,928) (435) (7,632) (3,933)
-------- ------- -------- --------
Capital Share Transactions:
Proceeds from shares sold 40,720 48,834 39,322 93,554
Net asset value of shares
issued in reinvestment
of dividends 1,525 320 5,578 3,101
Less payments for shares
redeemed (36,688) (5,106) (66,881) (38,241)
-------- ------- -------- --------
Increase (decrease) in net
assets from capital share
transactions 5,557 44,048 (21,981) 58,414
-------- ------- -------- --------
Total increase (decrease) in
net assets 4,104 44,545 (31,635) 65,098
Net Assets:
Beginning of period 44,545 -- 138,067 72,969
-------- ------- -------- --------
End of period (including
undistributed net investment
income of $6, $3, $23 and
$13 respectively) $ 48,649 $44,545 $106,432 $138,067
======== ======= ======== ========
Number of Fund Shares:
Sold 4,035 4,872 3,601 8,573
Reinvested 152 32 512 283
Redeemed (3,664) (508) (6,147) (3,487)
-------- ------- -------- --------
Net increase (decrease) in
shares outstanding 523 4,396 (2,034) 5,369
Shares Outstanding:
Beginning of period 4,396 -- 12,265 6,896
-------- ------- -------- --------
End of period 4,919 4,396 10,231 12,265
======== ======= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
91
<PAGE> 92
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
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, 1994
- --------------------------------------------------------------------------------
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. During 1993, the Trust
elected to change its fiscal year end from December 31 to August 31.
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 a 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.
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.
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.
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.
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SchwabFunds(R) 12
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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, 1994
- --------------------------------------------------------------------------------
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, 1994, (for financial reporting and federal income tax purposes),
net unrealized depreciation for the Schwab California Short/Intermediate
Tax-Free Bond Fund aggregated $893,000, of which $27,000 related to appreciated
securities and $920,000 related to depreciated securities, and net unrealized
depreciation for the Schwab California Long-Term Tax-Free Bond Fund aggregated
$512,000, of which $1,523,000 related to appreciated securities and $2,035,000
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 $214,000 and $498,000, respectively, during the year ended August 31,
1994, 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, 1994, 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 $131,000, and
$304,000, 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, 1994, 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 and expenses aggregating $12,000 related to the Trust's
unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
During the year ended August 31, 1994, 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 $139,000 and $182,000 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 $57,000 and $65,000 for the Schwab California Short/Intermediate
Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund,
respectively.
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SchwabFunds(R) 13
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5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1994, 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 $21,363 $56,938
Proceeds of sales and maturities $16,822 $88,523
</TABLE>
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab California
Short/Intermediate Schwab California
Tax-Free Bond Fund Long-Term Tax-Free Bond Fund
------------------------------ -----------------------------------------------
For the period For the period
April 21, 1993 For the February 24, 1992
For the (commencement For the eight month (commencement
year ended of operations) to year ended period ended of operations) to
August 31, August 31, August 31, August 31, December 31,
1994 1993 1994 1993 1992
---------- ----------------- ---------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.13 $ 10.00 $ 11.26 $ 10.58 $ 10.00
Income from Investment Operations
Net investment income .37 .13 .56 .38 .51
Net realized and unrealized
gain (loss) on investments (.24) .13 (.74) .68 .58
------- ------- -------- --------
Total from investment operations .13 .26 (.18) 1.06 1.09
Less Distributions
Dividends from net
investment income (.37) (.13) (.56) (.38) (.51)
Distributions from realized
gain on investments -- -- (.12) -- --
------- ------- -------- -------- --------
Total distributions (.37) (.13) (.68) (.38) (.51)
------- ------- -------- --------
Net asset value at end of period $ 9.89 $ 10.13 $ 10.40 $ 11.26 $ 10.58
======= ======= ======== ======== =======
Total return (%) 1.29 2.57 (1.70) 10.13 11.10
Ratios/Supplemental Data
Net assets, end of period (000s) $48,649 $44,545 $106,432 $138,067 $72,969
Ratio of expenses to average
net assets (%) .48 .45* .60 .60* .45*
Ratio of net investment income
to average net assets (%) 3.69 3.49* 5.12 5.18* 5.72*
Portfolio turnover rate (%) 35 0 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 Short/Intermediate Tax-Free Bond Fund for the periods ended August
31, 1994 and 1993 would have been .86% and 1.25%*, respectively, and the ratio
of net investment income to average net assets would have been 3.31% and
2.69%*, respectively. With respect to the Schwab California Long-Term Tax-Free
Bond Fund the ratio of expenses to average net assets for the periods ended
August 31, 1994, 1993 and December 31, 1992 would have been .80%, .87%* and
1.05%*, respectively, and the ratio of net investment income to average net
assets would have been 4.92%, 4.91%* and 5.12%*, respectively.
*Annualized
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SchwabFunds(R) 14
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To the Board of 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, 1994, the results of each of their operations and the
changes in each of their net assets for each of 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 audits
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, 1994 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 29, 1994
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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, INC.
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 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
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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.
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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, INC.
Duff-1 is the highest commercial paper rating assigned by Duff &
Phelps,Inc. ("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.
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."
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