<PAGE> 1
[SCHWAB FUNDS (R)
LOGO]
SCHWAB
GOVERNMENT
BOND FUNDS
ANNUAL REPORT
AUGUST 31, 1996
[Photo of the Schwab Building, San Francisco, California]
<PAGE> 2
Dear Shareholder,
[Photo I'd like to take this opportunity to share some thoughts on mutual
of fund investing and tell you how we're working to expand our
Charles services to keep pace with your changing needs.
R. Schwab]
First, however, I want to extend a personal welcome to the many thousands of new
shareholders who've joined the SchwabFunds Family(R) since our last report to
you. With your support, we've become one of the largest and fastest-growing
organizations in the mutual fund industry. Today, Charles Schwab Investment
Management, Inc. serves nearly 2 million shareholders with total assets under
management in excess of $39 billion. SchwabFunds(R) has grown into a mutual fund
complex offering retail investors 26 funds covering a broad range of financial
markets and investing approaches.
TIME-TESTED INVESTING STRATEGIES THAT OFFER YOU AN EXPANDING RANGE OF
OPPORTUNITIES.
Over the past 12 months, we've introduced eight new funds, each built on
specific, time-tested strategies. The three Schwab Asset Director(R) Funds help
you diversify your portfolio through asset allocation, the Schwab S&P 500 Fund
seeks to track U.S. stock market performance through indexing, the Schwab
Analytics Fund(TM) uses advanced quantitative methods to identify attractive
investment opportunities, and the three Schwab OneSource Portfolios help you
diversify your portfolio across asset classes and fund management styles through
their fund-of-funds approach.* Along with our other offerings, these new funds
give you powerful tools you can use to help construct a custom investment
portfolio that matches your individual goals. And, of course, they also allow
you to tap into the combined investing expertise of our highly experienced team
of professional portfolio managers.
ENHANCING SHAREHOLDER COMMUNICATIONS.
Our commitment to shareholders goes beyond simply offering you new investment
opportunities. We also want to help you become a more-informed mutual fund
investor by providing the in-depth information you need to help manage your
portfolio more effectively. Toward that end, we've changed the format of this
report to make it more informative.
If you'd like more information on any of the funds in the SchwabFunds Family,
call 1-800-2 NO-LOAD (1-800-266-5623). Our representatives will be happy to
provide you with a free prospectus, which contains more complete information on
fund risks, charges and expenses. Please read it carefully before investing.
Thank you for placing your trust in us. We'll continue working hard to offer you
an even broader range of strategic investment opportunities.
/s/ Charles R. Schwab
Charles R. Schwab
*The Schwab OneSource Portfolios-Growth Allocation and Schwab OneSource
Portfolios-Balanced Allocation Funds are in subscription until November 15,
1996, unless the subscription period is extended, at an introductory share price
of $10. After that date the share price will fluctuate.
COVER: THE SCHWAB BUILDING, SAN FRANCISCO, CALIFORNIA
<PAGE> 3
KEEP YOUR
MONEY WORKING
HARDER!
Use this envelope to easily add to
your Schwab Bond Fund.
CHARLES SCHWAB
ATTN: DEPT. AIP 3-33-4
NO POSTAGE
NECESSARY IF
MAILED IN THE
UNITED STATES
BUSINESS REPLY MAIL
FIRST-CLASS MAIL PERMIT NO. 18125 SAN FRANCISCO, CA
POSTAGE WILL BE PAID BY ADDRESSEE
CHARLES SCHWAB & CO INC
PO BOX 7778
SAN FRANCISCO CA 94120-9419
<PAGE> 4
WE'VE MADE IT EASIER FOR YOU! TAKE ADVANTAGE OF THIS OPPORTUNITY TO ADD TO YOUR
SCHWAB BOND FUND INVESTMENT.
Now, you can add to your account by using this convenient Schwab investment
coupon. It's a simple, easy way to increase your investment. You can also have
money transferred to your bond fund directly from your bank account or payroll
check using Schwab's free Automatic Investment Plan (AIP)(1). If you'd like more
information on AIP, just check the appropriate box on the coupon. We'll send
you everything you need to get started.
DON'T DELAY. USE THIS CONVENIENT INVESTMENT ENVELOPE AND SEND YOUR CHECK TODAY!
(1) The Automatic Investment Plan does not ensure profit or protect against
loss in declining markets.
- --------------------------------------------------------------------------------
PLEASE DETACH HERE.
SCHWAB BOND FUND
INVESTMENT COUPON
- --------------------
Please enclose your check and this ________________ - ________________
completed investment coupon in the SCHWAB ACCOUNT NUMBER
attached postage-paid envelope.
PLEASE INDICATE TO WHICH SCHWAB BOND
FUND YOUR INVESTMENT SHOULD GO:
____________________________________
NAME / / Schwab Long-Term Government Bond
Fund
$ / / Schwab Short/Intermediate
____________________________________ Government Bond Fund
AMOUNT OF INVESTMENT*
/ / Schwab California Long-Term
Tax-Free Bond Fund
____________________________________
SIGNATURE / / Schwab California
Short/Intermediate Tax-Free Bond
/ / Check here if you would like Fund
more investment coupons for
future use. / / Schwab Long-Term Tax-Free Fund
/ / Check here if you would like / / Schwab Short/Intermediate Tax-Free
more information on Schwab's Fund
Automatic Investment Plan (AIP).
IF NO FUND IS INDICATED, YOUR
INVESTMENT WILL GO INTO THE SWEEP
*THIS ENVELOPE MAY NOT BE USED FOR ACCOUNT YOU'VE DESIGNATED.
INITIAL INVESTMENTS. SUBSEQUENT
INVESTMENT MINIMUM IS $100.
(C) 1996 Charles Schwab & Co., Inc.
All rights reserved. Member SIPC/NYSE.
Printed on recycled paper.
TF4269(10/96) CBS 10552
(Lift here for more information.)
CHARLES SCHWAB
JUST FOLLOW THESE EASY STEPS TO INVEST IN YOUR SCHWAB BOND FUND:
Fill out the Schwab investment coupon completely, including your name,
1. account number, amount of your check and signature. Please use one
coupon for each account.
Make your check payable to CHARLES SCHWAB & CO., INC., and enclose
2. your check with the completed coupon in this postage-paid envelope.
Then just drop your Schwab Bond Fund investment envelope in the mail
3. today--and start putting your money to work! If you have any questions,
don't hesitate to call your local Schwab office or 1-800-2 NO-LOAD.
THIS ENVELOPE MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT SCHWAB BOND FUND
PROSPECTUS. THE PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
<PAGE> 5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<S> <C>
DIVIDEND PAYMENT ................................................. 2
PERFORMANCE ...................................................... 3
FUND INVESTMENTS ................................................. 6
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
AND MARKET OVERVIEW .............................................. 7
FINANCIAL STATEMENTS AND NOTES ...................................15
- --------------------------------------------------------------------------------
</TABLE>
We are pleased to report to you on the performance of the Schwab
Short/Intermediate Government Bond Fund and the Schwab Long-Term Government Bond
Fund (the "Funds") for their fiscal year ended August 31, 1996. During the
fiscal year, both Funds continued to help you achieve your investment goals by
providing a relatively steady stream of monthly income, consistent with capital
preservation. Each Fund's individual performance is reviewed in detail in the
following pages.
1
<PAGE> 6
DIVIDEND PAYMENT FOR THE FISCAL YEAR
FROM EACH FUND'S INCEPTION DATE
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
=======================================================================
1991* 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Dividends $0.10 $0.60 $0.37 $0.54 $0.59 $0.59
- -----------------------------------------------------------------------
Capital Gains -- $0.03 -- $0.12 -- --
- -----------------------------------------------------------------------
</TABLE>
*Commencement of operations November 5, 1991.
<TABLE>
<CAPTION>
SCHWAB LONG-TERM GOVERNMENT BOND FUND
========================================================================
1993* 1994 1995 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Dividends $0.31 $0.60 $0.69 $0.65
- ------------------------------------------------------------------------
Capital Gains -- -- -- --
- ------------------------------------------------------------------------
</TABLE>
*Commencement of operations March 5, 1993.
2
<PAGE> 7
PERFORMANCE
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
=======================================================================
Yield and Total Return as of August 31, 1996
Average Annual
30-Day One-Year Total Return
SEC Yield Total Return Since Inception (11/5/91)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
5.77% 4.39% 5.48%
========================================================================
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The
Investment Manager and Schwab waived a portion of their fees during the fiscal
year and have guaranteed that maximum total operating expenses will not exceed
0.49% through at least 12/31/96. Without fee waivers and guarantees, for the
periods ended 8/31/96, the Fund's 30-day SEC yield, one-year total return and
average annual total return since inception would have been 5.39%, 4.06%, and
5.14%, respectively.
<TABLE>
<CAPTION>
SCHWAB LONG-TERM GOVERNMENT BOND FUND
=======================================================================
Yield and Total Return as of August 31, 1996
Average Annual
30-Day One-Year Total Return
SEC Yield Total Return Since Inception (3/5/93)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
7.23% 2.29% 4.92%
=======================================================================
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The
Investment Manager and Schwab absorbed all of the Fund's fees during the fiscal
year and have guaranteed to do so through at least 12/31/96. Without this
absorption, for the periods ended 8/31/96, the Fund's 30-day SEC yield, one-year
total return and average annual total return since inception would have been
4.86%, 1.14%, and 2.20%, respectively.
3
<PAGE> 8
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND AND
THE LEHMAN MUTUAL FUND SHORT (1-3 YEAR) U.S. GOVERNMENT INDEX
----------------------------
AVERAGE ANNUAL TOTAL RETURNS
THROUGH AUGUST 31, 1996
----------------------------
ONE YEAR SINCE INCEPTION
4.39% 5.48%
----------------------------
[Line graph of comparison between Schwab Short/Intermediate Bond Fund and Lehman
Mutual Fund Short (1-3 Year) U.S. Government Index]
<TABLE>
<CAPTION>
Lehman Mutual Fund Schwab/Short/
Short (1-3 Year) Intermediate
DATE U.S. Government Index Government Bond Fund
- -------- --------------------- -------
<S> <C> <C>
$10,000 $10,000
11/6 to 11/30/91 10,059 10,117
12/31/91 10,212 10,381
1/31/92 10,199 10,241
2/29/92 10,229 10,240
3/31/92 10,226 10,190
4/30/92 10,319 10,282
5/31/92 10,415 10,440
6/30/92 10,521 10,595
7/31/92 10,642 10,794
8/31/92 10,728 10,898
9/30/92 10,829 11,053
10/31/92 10,767 10,924
11/30/92 10,751 10,868
12/31/92 10,851 11,012
1/31/93 10,965 11,202
2/28/93 11,052 11,355
3/31/93 11,087 11,395
4/30/93 11,154 11,499
5/31/93 11,128 11,462
6/30/93 11,211 11,622
7/31/93 11,236 11,661
8/31/93 11,329 11,823
9/30/93 11,365 11,851
10/31/93 11,390 11,892
11/30/93 11,392 11,819
12/31/93 11,438 11,873
1/31/94 11,509 11,973
2/28/94 11,439 11,780
3/31/94 11,380 11,628
4/30/94 11,337 11,527
5/31/94 11,353 11,485
6/30/94 11,381 11,500
7/31/94 11,484 11,599
8/31/94 11,522 11,628
9/30/94 11,495 11,585
10/31/94 11,522 11,593
11/30/94 11,473 11,528
12/31/94 11,495 11,540
1/31/95 11,654 11,697
2/28/95 11,815 11,852
3/31/95 11,883 11,919
4/30/95 11,989 12,018
5/31/95 12,197 12,232
6/30/95 12,263 12,281
7/31/95 12,314 12,308
8/31/95 12,388 12,396
9/30/95 12,449 12,470
10/31/95 12,552 12,572
11/30/95 12,659 12,696
12/31/95 12,754 12,799
1/31/96 12,862 12,900
2/29/96 12,812 12,817
3/31/96 12,803 12,778
4/30/96 12,816 12,776
5/31/96 12,844 12,777
6/30/96 12,938 12,878
7/31/96 12,988 12,917
8/31/96 13,036 12,940
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance graph compares a hypothetical $10,000 investment in the Schwab
Short/Intermediate Government Bond Fund since inception with a hypothetical
investment in the Lehman Mutual Fund Short (1-3 Year) U.S. Government Index. The
Index is unmanaged and assumes reinvestment of all dividends, and, unlike the
Fund, does not reflect the payment of advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly. Fund total return assumes the reinvestment of all dividends and
capital gain distributions, if any. The Investment Manager and Schwab waived a
portion of their fees during the reporting period, and have guaranteed that
maximum total operating expenses will not exceed 0.49% through at least
12/31/96. Without fee waivers and guarantees, the Fund's total return would have
been lower.
4
<PAGE> 9
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB LONG-TERM GOVERNMENT BOND FUND AND
THE LEHMAN MUTUAL FUND GENERAL U.S. GOVERNMENT INDEX
--------------------------------
AVERAGE ANNUAL TOTAL RETURNS
THROUGH AUGUST 31, 1996
--------------------------------
ONE YEAR SINCE INCEPTION
2.29% 4.92%
--------------------------------
[Line graph of comparison of Schwab Long-Term Government Bond Fund and the
Lehman Mutual Fund General U.S. Government Index.]
<TABLE>
<CAPTION>
Lehman Mutual Fund Schwab Long-Term
General U.S. Government Bond
DATE Government Index Fund
- ----------- ----------------- ----------------
<S> <C> <C>
4/1/93 10,000 10,000
4/30/93 10,077 9,890
5/31/93 10,066 9,927
6/30/93 10,289 10,314
7/31/93 10,352 10,441
8/31/93 10,583 10,863
9/30/93 10,623 10,901
10/31/93 10,664 10,952
11/30/93 10,546 10,688
12/31/93 10,587 10,738
1/31/94 10,732 10,938
2/28/94 10,505 10,544
3/31/94 10,269 10,220
4/30/94 10,187 10,112
5/31/94 10,174 10,060
6/30/94 10,151 10,027
7/31/94 10,338 10,239
8/31/94 10,340 10,233
9/30/94 10,194 10,005
10/31/94 10,187 10,036
11/30/94 10,168 10,031
12/31/94 10,230 10,122
1/31/95 10,421 10,347
2/28/95 10,645 10,648
3/31/95 10,712 10,718
4/30/95 10,852 10,887
5/31/95 11,289 11,429
6/30/95 11,376 11,445
7/31/95 11,334 11,348
8/31/95 11,467 11,566
9/30/95 11,577 11,711
10/31/95 11,753 11,931
11/30/95 11,936 12,173
12/31/95 12,106 12,395
1/31/96 12,180 12,438
2/29/96 11,931 12,075
3/31/96 11,832 11,934
4/30/96 11,756 11,766
5/31/96 11,736 11,722
6/30/96 11,888 11,885
7/31/96 11,918 11,890
8/31/96 11,891 11,830
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance graph compares a hypothetical $10,000 investment in the Schwab
Long-Term Government Bond Fund since inception with a hypothetical investment in
the Lehman Mutual Fund General U.S. Government Index. The Index is unmanaged and
assumes reinvestment of all dividends, and, unlike the Fund, does not reflect
the payment of advisory fees and other expenses associated with an investment in
the Fund. Investors cannot invest in an index directly. Fund total return
assumes the reinvestment of all dividends and capital gain distributions, if
any. The Investment Manager and Schwab absorbed all of the Fund's operating
expenses and have guaranteed to do so through at least 12/31/96. Without
absorption the Fund's total return would have been lower.
5
<PAGE> 10
FUND INVESTMENTS
The investment portfolios of both Funds consist of a mix of bonds issued or
guaranteed by the U.S. government, its agencies and instrumentalities. More
detailed information on each Fund's investments, as of August 31, 1996, can be
found in the Schedule of Investments section of this report following the
Question and Answer section. This information is not necessarily indicative of
the Funds' future holdings.
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND COMPOSITION
<TABLE>
<S> <C>
U.S. Treasury Obligations 46.8%
Cash Equivalents 0.8%
Agency Obligations 43.9%
Collateralized Mortgage Obligations 8.5%
</TABLE>
SCHWAB LONG-TERM GOVERNMENT BOND FUND COMPOSITION
<TABLE>
<S> <C>
U.S. Treasury Obligations 46.2%
Cash Equivalents 4.5%
Agency Obligations 49.3%
</TABLE>
6
<PAGE> 11
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM OF CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
STEPHEN B. WARD - Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of each Fund's portfolio. Steve joined
CSIM as Vice President and Portfolio Manager in April 1991, and was promoted to
his current position in August 1993. Prior to joining CSIM, Steve was Vice
President and Portfolio Manager at Federated Investors. He holds an MBA from the
Wharton School, a B.A. in economics from Virginia Tech, and has been a Chartered
Financial Analyst since 1985.
ANDREA REGAN - Portfolio Manager, has primary responsibility for the day-to-day
management of each Fund's portfolio. Andrea joined CSIM in January 1991 and
currently manages approximately $3 billion in assets. Prior to joining CSIM,
Andrea was Vice President and Manager of Trading for Merus Capital Management,
the investment management division of the Bank of California. She holds a B.S.
in accounting from San Jose State University.
MARKET OVERVIEW
ECONOMIC HIGHLIGHTS
At the beginning of the fiscal year there was concern about the likelihood of an
economic recession. However, as time progressed the economic climate changed. By
August 31, 1996 sentiment was focused on the apparent strength of the economy
and its potential impact on future inflation. During the first half of 1996,
many economic observers were surprised by the increase in the real Gross
Domestic Product (GDP) growth rate and the strength of the labor market. The
real GDP growth rate was 2.0% for the first quarter of 1996 and 4.7% for the
second quarter. The average monthly increase in payroll employment jumped from
185,000 in 1995 to 234,000 during the first eight months of 1996, leading to the
lowest unemployment rates in this decade.
The economy continues to exhibit signs of strong economic growth as evidenced by
the growth in jobs, retail sales, auto sales and construction spending.
Inflation has remained relatively low, as evidenced by the
7
<PAGE> 12
3.0% increase in the Consumer Price Index (CPI) for the 12 months ended August
31, 1996. However, there still remains a concern that the economy is performing
at or near its employment and manufacturing capacity. As a result, the Federal
Reserve (the Fed) has indicated it will maintain a posture of "heightened
surveillance" and remain diligent in its effort to prevent increases in
inflation.
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
[Line graph of Total Return Performance of Schwab Small-Cap Index, S&P 500,
Schwab International Index and the Lehman MF General U.S. Govt. Index.]
<TABLE>
<CAPTION>
SCHWAB SCHWAB LEHMAN MF
SMALL CAP INTERNATIONAL GENERAL US
DATE S&P 500 INDEX INDEX GOVT. INDEX
- ------ ------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Aug-95 $1.000 $1.000 $1.000 $1.000
Sep-95 1.042 1.020 1.024 1.010
Oct-95 1.038 0.971 1.007 1.025
Nov-95 1.084 1.017 1.035 1.041
Dec-95 1.105 1.042 1.075 1.056
Jan-96 1.142 1.039 1.078 1.062
Feb-96 1.153 1.081 1.080 1.040
Mar-96 1.164 1.100 1.101 1.032
Apr-96 1.181 1.158 1.127 1.025
May-96 1.212 1.197 1.113 1.024
Jun-96 1.216 1.159 1.121 1.037
Jul-96 1.162 1.066 1.092 1.039
Aug-96 1.187 1.133 1.101 1.037
</TABLE>
TOTAL RETURN ASSUMES INVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices are
representative returns of specific market sectors from 9/1/95 through 8/31/96
and DO NOT reflect a fund's performance. Indices are unmanaged, and unlike a
fund, do not reflect advisory fees and other expenses associated with an
investment in a fund. Investors cannot invest in an index directly.
DOMESTIC EQUITY MARKET HIGHLIGHTS
As shown in the graph above, large-cap stocks, as represented by the S&P 500,
outperformed small-cap stocks, international stocks and bonds, achieving a total
return of 18.7% for the fiscal year. The S&P 500 reached its fiscal year high
late in May, marking the end of (or at least a pause in) a remarkable 52.4%
total return since the beginning of 1995.
8
<PAGE> 13
Many segments of the equity market reached record highs and demonstrated
significant volatility during the fiscal year. The Dow Jones Industrial Average
and the S&P 500 reached record highs of 5,778.0 on May 22 and 678.5 on May 24,
respectively. The NASDAQ Index reached a record high of 1,249.1 on June 5, then
proceeded to drop 8.6% by the end of the fiscal year. Three of the eight
all-time largest daily point losses for the Dow occurred during the fiscal
year--two of which were a result of stronger than expected payroll growth and
the attendant fears that the Fed might raise short-term interest rates.
Using most traditional measures, such as price-to-book value and dividend yield,
many major market indices remain valued near their historic highs. The primary
exception is the price-to-earnings ratio which, at 19 times earnings (for the
S&P 500), is well above its historical average, but below its 1991 and 1987
highs of 26 and 22, respectively.
INTERNATIONAL EQUITY MARKET HIGHLIGHTS
International equity returns were more modest and were heavily influenced by the
strengthening dollar. In local currency terms, the total return of the Schwab
International Index 1 for the 12 months ended August 31, 1996 was 13.43%.
However, because the U.S. dollar increased in value against most other
currencies, the total return for U.S. dollar-denominated investors was 10.14%.
DOMESTIC BOND MARKET HIGHLIGHTS
As shown in the chart on the following page, during the first half of the fiscal
year, both intermediate and long-term Treasury bond yields declined, causing a
corresponding increase in the value of bonds. This decline in rates was a result
of concerns over a potential recession, an anticipated decline in demand for
borrowing and reduced inflationary expectations. The domestic bond market
experienced a dramatic reversal in sentiment during February, which marked the
beginning of a sharp increase in Treasury bond yields and a corresponding
decrease in the
1 The Schwab International Index is representative of the international equity
market. This Index is comprised of the stocks of the 350 largest non-U.S.
companies located in countries with developed securities markets and excludes
investment companies.
9
<PAGE> 14
30-YEAR AND 5-YEAR TREASURY BOND YIELDS
[Line graph of comparison of 30-Year Treasury Bond Yield and 5-Year Treasury
Bond Yield.]
<TABLE>
<CAPTION>
30-Year 5-Year
Treasury Bond Treasury Bond
Yield Yield
- -----------------------------------------------------------
<S> <C> <C>
9/1/95 6.62% 6.02%
9/8/95 6.59 6.03
9/15/95 6.48 5.93
9/22/95 6.59 6.06
9/29/95 6.50 6.02
10/6/95 6.42 5.88
10/13/95 6.30 5.80
10/20/95 6.36 5.90
10/27/95 6.36 5.83
11/3/95 6.28 5.70
11/10/95 6.34 5.76
11/17/95 6.23 5.65
11/24/95 6.25 5.69
12/1/95 6.09 5.49
12/8/95 6.05 5.55
12/15/95 6.10 5.57
12/22/95 6.06 5.50
12/29/95 5.95 5.38
1/5/96 6.05 5.41
1/12/96 6.15 5.43
1/19/96 5.97 5.27
1/26/96 6.05 5.33
2/2/96 6.16 5.26
2/9/96 6.10 5.23
2/16/96 6.24 5.30
2/23/96 6.41 5.51
3/1/96 6.37 5.58
3/8/96 6.71 6.06
3/15/96 6.74 6.18
3/22/96 6.66 6.06
3/29/96 6.67 6.09
4/5/96 6.82 6.38
4/12/96 6.80 6.29
4/19/96 6.79 6.32
4/26/96 6.79 6.28
5/3/96 7.12 6.60
5/10/96 6.93 6.47
5/17/96 6.83 6.41
5/24/96 6.83 6.41
5/31/96 6.99 6.63
6/7/96 7.03 6.70
6/14/96 7.09 6.70
6/21/96 7.10 6.72
6/28/96 6.87 6.46
7/5/96 7.19 6.82
7/12/96 7.03 6.65
7/19/96 6.97 6.57
7/26/96 7.01 6.63
8/2/96 6.74 6.27
8/9/96 6.69 6.22
8/16/96 6.77 6.30
8/23/96 6.96 6.51
8/30/96 7.12 6.72
</TABLE>
value of bonds. The increase in rates was a result of strong economic data and
concerns that the economy may be growing too fast, which could result in higher
inflation levels in the future.
Q. WHAT ACTIONS DID THE PORTFOLIO MANAGERS TAKE ON BEHALF OF THE FUNDS TO
RESPOND TO CHANGES IN INTEREST RATES?
A. In response to the strong economic reports, heightened market volatility and
the possibility of restrictive action by the Fed, we adopted a defensive
portfolio strategy. By maintaining the Funds' weighted average maturity near the
shorter end of their maturity spectrums, we were able to minimize the effects of
recent market volatility as well as minimize the impact of price declines in the
value of portfolio holdings resulting from rising interest rates. During the
year, we made moderate adjustments to the weighted average maturity of both
Funds in an effort to lock in higher yields during periods when we felt the
market had overreacted to some of the stronger than expected economic reports.
10
<PAGE> 15
The weighted average maturity of the Schwab Short/Intermediate Government Bond
Fund was increased from approximately 2.5 years in September 1995 to
approximately 2.9 years by the end of January 1996. This moderate lengthening
helped the Fund capitalize on the decline in rates and associated increase in
bond prices during the first part of the fiscal year. In February, the Fund's
maturity was reduced to approximately 2.5 years, where it was maintained
throughout the remainder of the fiscal year. This positioning helped to minimize
the impact of the rise in rates and associated fall in bond prices during the
second half of the fiscal year.
For similar reasons, the Schwab Long-Term Government Bond Fund maintained an
average weighted maturity of approximately 12-13 years during the first three
months of the fiscal year. We began shortening the average maturity at the end
of 1995. By May 1996, and for the remainder of the fiscal year, the Fund's
maturity was reduced to less than 11 years. Given the Fund's investment
objective of maintaining an average maturity of at least 10 years, this
represents a cautious strategy. With the rapid increase in bond yields in
February and March, the shorter average maturity helped to mitigate the decline
in bond prices held in the Fund.
With a strong outlook for economic growth at the end of the fiscal year, we
expect to remain cautious in our strategies for managing both Funds. We will
continue to focus on the economic and political environment and to monitor the
various sectors of the government securities market that may impact our
investment strategies.
Q. HOW DO THE SCHWAB GOVERNMENT BOND FUNDS FIT INTO AN ASSET ALLOCATION PLAN?
A. The Schwab Government Bond Funds can be used to fulfill all or a portion of
the bond component of an asset allocation plan. Bond funds can be an important
element in an asset allocation plan because of their ability to generate income
and reduce overall portfolio volatility. The choice of a taxable or tax-exempt
bond fund depends on whether or not you plan to hold the fund in a tax-deferred
account, such as an IRA or 401(k). If not, your marginal tax bracket will play
an important role in your choice of a taxable or tax-exempt bond fund.
11
<PAGE> 16
Short/intermediate bond funds historically have offered greater price stability
in exchange for lower yields, while bond funds with longer weighted average
maturities historically have paid higher yields with correspondingly greater
price volatility. Bond funds with longer weighted average maturities
historically have offered more stable income streams because they can lock in
rates on individual bonds for longer periods of time. The selection of the most
appropriate bond fund will depend on your degree of risk tolerance and your
investing time frame. To position your income portfolio to respond to
fluctuating interest rates or to create a balanced combination of maturities,
you may wish to consider investing in both Schwab Government Bond Funds.
Q. HOW ARE THE FUNDS' MONTHLY DIVIDEND DISTRIBUTIONS DETERMINED?
A. Our general dividend policy is to pay out 100% of each Fund's net investment
income to shareholders on an annual basis. Since net investment income is
accrued daily, and some months have more days than others, we apply a
"normalization" factor to each month's dividend. This factor is designed to
smooth out the normal monthly variations in dividends which would result from
the varying number of days in different months. However, this does not mean that
the monthly dividend will not fluctuate. Fund holdings are constantly changing
as new investors invest in the Fund, or as we make changes in the portfolio to
respond to changing market conditions. For example, if interest rates fall, we
invest new shareholder contributions and reinvested dividends at the new lower
rates, which in turn has the effect of reducing the monthly dividend. We believe
that this is not necessarily bad, since a fall in rates is typically associated
with a rise in the Fund's net asset value. Some bond funds make an effort to
maintain a constant monthly dividend. We believe that this is not always a wise
strategy, because in times of falling interest rates, the manager may be taking
on additional portfolio risk in order to maintain the dividend level.
12
<PAGE> 17
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET CHANGE
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Change Over
as of 8/31/96 as of 8/31/95 Reporting
(000s) (000s) Period
- -----------------------------------------------------------------
<S> <C> <C>
$134,019 $157,191 (15%)
- -----------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1996
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- ------------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months $ 20,669 15.6% 15.6%
7 - 36 Months 57,788 43.6 59.2
37 - 60 Months 51,567 38.9 98.1
Over 60 Months 2,566 1.9 100.0%
-------- -----
$132,590 100.0%
======== =====
</TABLE>
Average Weighted Maturity--2.52 Years
13
<PAGE> 18
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 8/31/96 as of 8/31/95 Reporting
(000s) (000s) Period
- ---------------------------------------------------------
<S> <C> <C>
$22,761 $12,949 76%
- ---------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1996
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- ---------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 1,008 4.5% 4.5%
2 - 10 Years 16,440 74.0 78.5
11 - 20 Years 2,688 12.1 90.6
21 - 30 Years 2,080 9.4 100.0%
------- -----
$22,216 100.0%
======= =====
</TABLE>
Average Weighted Maturity--10.98 Years
14
<PAGE> 19
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS--46.8%(a)
U.S. Treasury Notes
5.63%, 08/31/97 $ 4,000 $ 3,986
7.38%, 11/15/97 7,000 7,100
7.88%, 01/15/98 2,700 2,760
7.25%, 02/15/98 5,000 5,071
5.88%, 08/15/98 12,000 11,899
6.38%, 05/15/99 5,000 4,985
6.88%, 07/31/99 3,000 3,027
7.13%, 09/30/99 5,000 5,080
7.75%, 12/31/99 5,000 5,173
5.88%, 06/30/00 3,000 2,922
6.13%, 09/30/00 2,000 1,961
6.63%, 06/30/01 8,000 7,968
-------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $62,254) 61,932
-------
AGENCY OBLIGATIONS--43.9%(a)
Federal Home Loan Bank
7.59%, 02/03/97 9,425 9,496
7.76%, 05/30/97 5,000 5,068
7.28%, 02/24/98 6,340 6,420
6.26%, 08/09/99 5,000 4,950
6.70%, 04/23/01 5,000 4,916
Federal Home Loan Mortgage Corp.
8.40%, 11/30/01 2,500 2,566
Federal National Mortgage Assoc.
6.57%, 08/10/00 5,000 4,915
6.75%, 08/24/00 5,000 4,945
6.45%, 03/26/01 5,000 4,877
Student Loan Marketing Assoc.
7.56%, 12/09/96 10,000 10,049
-------
TOTAL AGENCY OBLIGATIONS
(Cost $58,313) 58,202
-------
</TABLE>
15
<PAGE> 20
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS
(PLANNED AMORTIZATION CLASS)--8.5%(a)(c)
Federal Home Loan Mortgage Corp. Series 1295 G
7.50%, 05/15/99 $ 2,500 $ 2,522
Federal Home Loan Mortgage Corp. Series 1449 E
6.00%, 09/15/99 6,000 5,830
Federal National Mortgage Assoc. Series 1992-94 G
7.00%, 04/25/00 3,000 2,980
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(PLANNED AMORTIZATION CLASS)
(Cost $11,386) 11,332
--------
CASH EQUIVALENTS--0.8%
Federal Home Loan Mortgage Corp.--Discount Note(b)
5.32%, 11/29/96 625 617
Shares
-------
Provident Institutional Funds--Fed Funds Portfolio(d)
4.92%, 09/07/96 507 507
--------
TOTAL CASH EQUIVALENTS
(Cost $1,124) 1,124
--------
TOTAL INVESTMENTS--100.0%
(Cost $133,077) $132,590
========
</TABLE>
See accompanying Notes to Schedules of Investments.
16
<PAGE> 21
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
AGENCY OBLIGATIONS--49.3%(a)
Federal Farm Credit Bank
8.06%, 01/04/05 $ 815 $ 855
6.27%, 01/26/16 1,000 875
Federal Home Loan Bank
6.45%, 06/08/05 1,000 952
6.43%, 09/19/05 1,000 950
Federal Home Loan Mortgage Corp.
6.92%, 09/15/05 1,000 954
7.53%, 08/07/06 2,000 1,971
8.57%, 10/26/09 500 515
Federal National Mortgage Assoc.
8.50%, 02/01/05 500 518
7.88%, 02/24/05 1,135 1,180
6.35%, 06/10/05 1,000 946
6.65%, 03/08/06 800 749
Tennessee Valley Authority
6.38%, 06/15/05 500 472
-------
TOTAL AGENCY OBLIGATIONS
(Cost $11,226) 10,937
-------
U.S. TREASURY OBLIGATIONS--46.2%(a)
U.S. Treasury Bonds
7.25%, 05/15/16 1,300 1,298
7.50%, 11/15/16 1,550 1,588
7.13%, 02/15/23 500 492
U.S. Treasury Notes
5.75%, 08/15/03 310 291
5.88%, 02/15/04 1,000 942
7.25%, 08/15/04 500 511
6.50%, 08/15/05 2,000 1,942
5.88%, 11/15/05 750 697
7.00%, 07/15/06 2,500 2,510
-------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $10,436) 10,271
-------
</TABLE>
17
<PAGE> 22
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
CASH EQUIVALENTS--4.5%
Federal Home Loan Mortgage Corp.--Discount Note(b)
5.32%, 11/29/96 $915 $ 903
Shares
------
Provident Institutional Funds--FedFund Portfolio(d)
4.92%, 09/07/96 105 105
-------
TOTAL CASH EQUIVALENTS
(Cost $1,008) 1,008
-------
TOTAL INVESTMENTS--100.0%
(Cost $22,670) $22,216
=======
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS
(a) Interest rates represent coupon rate of security.
(b) Interest rates represent the effective yield at time of purchase.
(c) Maturity dates represent average weighted maturities of the underlying
mortgage obligations.
(d) Interest rates represent the yield on August 31, 1996.
See accompanying Notes to Financial Statements.
18
<PAGE> 23
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $133,077 and $22,670,
respectively) $132,590 $22,216
Interest receivable 1,604 281
Receivable from advisor -- 28
Receivable for Fund shares sold 22 353
Deferred organization costs 2 23
Prepaid expenses 22 13
Dividends receivable 8 1
-------- -------
Total assets 134,248 22,915
-------- -------
LIABILITIES
Payable for:
Dividends 109 21
Fund shares redeemed 53 76
Investment advisory and administration
fee 11 --
Other 56 57
-------- -------
Total liabilities 229 154
-------- -------
Net assets applicable to outstanding
shares $134,019 $22,761
======== =======
NET ASSETS CONSIST OF:
Capital paid in $145,190 $23,507
Accumulated undistributed net
investment income 54 6
Accumulated net realized loss on
investments sold (10,738) (298)
Net unrealized loss on investments (487) (454)
-------- -------
$134,019 $22,761
======== =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 13,865 2,426
Net asset value, offering and redemption
price per share $9.67 $9.38
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE> 24
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Interest income $ 9,637 $ 1,100
--------- --------
Expenses:
Investment advisory and
administration fee 602 68
Transfer agency and shareholder
service fees 369 41
Custodian fees 82 13
Registration fees 28 15
Professional fees 30 26
Shareholder reports 38 11
Trustees' fees 8 3
Amortization of deferred organization
costs 16 12
Insurance and other expenses 9 4
--------- --------
1,182 193
Less expenses reduced and absorbed (462) (193)
--------- --------
Total expenses incurred by Fund 720 0
--------- --------
Net investment income 8,917 1,100
--------- --------
Net realized gain (loss) on investments
sold:
Proceeds from sales of investments 160,806 22,460
Cost of investments sold (160,799) (22,490)
--------- --------
Net realized gain (loss) on
investments sold 7 (30)
--------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 2,002 433
End of period (487) (454)
--------- --------
Decrease in net unrealized gain
on investments (2,489) (887)
--------- --------
Net loss on investments (2,482) (917)
--------- --------
Increase in net assets resulting
from operations $ 6,435 $ 183
========= ========
</TABLE>
See accompanying Notes to Financial Statements.
20
<PAGE> 25
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------- ------------------
Year ended August 31,
1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 8,917 $ 10,033 $ 1,100 $ 730
Net realized gain (loss) on
investments sold 7 (3,232) (30) 22
Increase (decrease) in net unrealized
gain on investments (2,489) 3,191 (887) 626
-------- -------- -------- -------
Increase in net assets resulting from
operations 6,435 9,992 183 1,378
-------- -------- -------- -------
Dividends to shareholders from net
investment income (8,934) (10,006) (1,098) (727)
-------- -------- -------- -------
Capital share transactions:
Proceeds from shares sold 25,765 32,379 21,398 14,400
Net asset value of shares issued in
reinvestment of dividends 6,945 7,729 741 486
Less payments for shares redeemed (53,383) (73,382) (11,412) (9,696)
-------- -------- -------- -------
Increase (decrease) in net assets from
capital share transactions (20,673) (33,274) 10,727 5,190
-------- -------- -------- -------
Total increase (decrease) in net assets (23,172) (33,288) 9,812 5,841
Net assets:
Beginning of period 157,191 190,479 12,949 7,108
-------- -------- -------- -------
End of period (including undistributed
net investment income of $54, $71,
$6 and $4, respectively) $134,019 $157,191 $ 22,761 $12,949
======== ======== ======== =======
Number of Fund shares:
Sold 2,618 3,324 2,191 1,535
Reinvested 707 794 77 51
Redeemed (5,428) (7,560) (1,163) (1,027)
-------- -------- -------- -------
Net increase (decrease) in shares
outstanding (2,103) (3,442) 1,105 559
Shares outstanding:
Beginning of period 15,968 19,410 1,321 762
-------- -------- -------- -------
End of period 13,865 15,968 2,426 1,321
======== ======== ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
21
<PAGE> 26
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Government Bond Fund and Schwab Long-Term
Government Bond Fund (the "Funds") are series of Schwab Investments (the
"Trust"), a no load, open-end, management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the Funds, the Trust also offers -- the Schwab 1000 Fund(R),
Schwab California Short/Intermediate Tax-Free Bond Fund, Schwab California
Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund. The assets of each series are segregated
and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income consistent with preservation of capital. The Funds each invest
primarily in securities issued or guaranteed by the United States Government,
its agencies or instrumentalities, and repurchase agreements collateralized by
these securities.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent 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.
22
<PAGE> 27
- ------------------------------------------------------------------------------
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Interest
income is recorded on the accrual basis and includes amortization of premium and
accretion of discount on investments. Realized gains and losses from security
transactions are determined on an identified cost basis. For callable bonds
purchased at a premium, the excess of the purchase price over the call value is
amortized against interest income through the call date. If the call provision
is not exercised, any remaining premium is amortized through the final maturity
date.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or government agency securities. All collateral is held by each Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, their initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five-year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
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.
23
<PAGE> 28
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized loss for the Schwab Short/Intermediate Government Bond Fund
aggregated $487,000 of which $462,000 related to appreciated securities and
$949,000 related to depreciated securities, and net unrealized loss for the
Schwab Long-Term Government Bond Fund aggregated $454,000, of which $169,000
related to appreciated securities and $623,000 related to depreciated
securities.
At August 31, 1996, the Schwab Short/Intermediate Government Bond Fund had
unused capital loss carryforwards, for federal income tax purposes, of
$8,355,000 and $2,216,000 expiring August 31, 2003 and August 31, 2004,
respectively. The Schwab Long-Term Government Bond Fund had unused capital loss
carryforwards of $230,000 expiring August 31, 2003.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. Under this agreement, the Schwab Short/Intermediate
Government Bond Fund and Schwab Long-Term Government Bond Fund incurred
investment advisory and administration fees of $602,000 and $68,000,
respectively, for the year ended August 31, 1996, 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 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
For the year ended August 31, 1996, the Schwab Short/Intermediate Government
Bond Fund and Schwab Long-Term Government Bond Fund incurred transfer agency and
shareholder service fees of $369,000 and $41,000, respectively, before Schwab
reduced its fees (see Note 4).
24
<PAGE> 29
- ------------------------------------------------------------------------------
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1996, 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 Funds incurred fees aggregating $11,000
related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit the ratio of operating expenses to average
net assets for each Fund. During the year ended August 31, 1996, the total of
such fees and expenses reduced and absorbed by the Investment Manager were
$149,000 and $152,000 for the Schwab Short/Intermediate Government Bond Fund and
Schwab Long-Term Government Bond Fund, respectively, and the total of such fees
reduced by Schwab were $313,000 and $41,000 for the Schwab Short/
Intermediate Government Bond Fund and Schwab Long-Term Government Bond Fund,
respectively (see Note 6).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1996, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Purchases $115,073 $19,950
Proceeds of sales and maturities $133,389 $10,683
</TABLE>
25
<PAGE> 30
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate Government Bond Fund
-------------------------------------------------------------------------------
Eight months Period
ended Year ended ended
Year ended August 31, August 31, December 31, December 31,
1996 1995 1994 1993 1992 1991++
----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28 $ 10.00
Income from investment
operations
Net investment income 0.59 0.59 0.54 0.37 0.60 0.10
Net realized and unrealized
gain (loss) on investments (0.17) 0.03 (0.71) 0.38 0.01 0.28
-------- -------- -------- -------- -------- -------
Total from investment
operations 0.42 0.62 (0.17) 0.75 0.61 0.38
Less distributions
Dividends from net investment
income (0.59) (0.59) (0.54) (0.37) (0.60) (0.10)
Distributions from realized
gain on investments -- -- (0.12) -- (0.03) --
-------- -------- -------- -------- -------- -------
Total distributions (0.59) (0.59) (0.66) (0.37) (0.63) (0.10)
-------- -------- -------- -------- -------- -------
Net asset value at end of period $ 9.67 $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28
======== ======== ======== ======== ======== =======
Total return (%) 4.39 6.61 (1.67) 7.39 6.08 3.79
Ratios/Supplemental data
Net assets, end of period
(000s) $134,019 $157,191 $190,479 $273,973 $226,223 $66,404
Ratio of expenses to average
net assets (%) 0.49 0.58 0.60 0.60* 0.43 0.35*
Ratio of net investment income
to average net assets (%) 6.03 6.11 5.28 5.28* 5.78 6.14*
Portfolio turnover rate (%) 80 203 91 107 185 4
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees and absorbed
expenses (%)+ 0.80 0.81 0.81 0.84* 0.89 1.47*
Ratio of net investment income
to average net assets prior
to reduced fees and absorbed
expenses (%)+ 5.72 5.88 5.07 5.04* 5.32 5.02*
</TABLE>
++ For the period November 5, 1991 (commencement of operations) to December 31,
1991.
+ 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.
* Annualized
26
<PAGE> 31
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Long-Term
Government Bond Fund
------------------------------------------------------
Period ended
Year ended August 31, August 31,
1996 1995 1994 1993++
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.80 $ 9.33 $10.53 $ 10.00
Income from investment
operations
Net investment income 0.65 0.69 0.60 0.31
Net realized and unrealized
gain (loss) on investments (0.42) 0.47 (1.20) 0.53
------- ------ ------ -------
Total from investment
operations 0.23 1.16 (0.60) 0.84
Less distributions
Dividends from net investment
income (0.65) (0.69) (0.60) (0.31)
Distributions from realized
gain on investments -- -- -- --
------- ------- ------ -------
Total distributions (0.65) (0.69) (0.60) (0.31)
------- ------- ------ -------
Net asset value at end of period $ 9.38 $ 9.80 $ 9.33 $ 10.53
======= ======= ====== =======
Total return (%) 2.29 13.03 (5.80) 8.63
Ratios/Supplemental data
Net assets, end of period
(000s) $22,761 $12,949 $7,108 $ 2,806
Ratio of expenses to average
net assets (%) 0.00 0.00 0.10 0.26*
Ratio of net investment income
to average net assets (%) 6.67 7.38 6.27 6.36*
Portfolio turnover rate (%) 66 240 123 42
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees and absorbed
expenses (%)+ 1.17 1.18 2.19 19.19*
Ratio of net investment income
to average net assets prior
to reduced fees and absorbed
expenses (%)+ 5.50 6.20 4.18 (12.57)*
</TABLE>
++ For the period March 5, 1993 (commencement of operations) to August 31, 1993.
+ 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.
* Annualized
27
<PAGE> 32
- ------------------------------------------------------------------------------
To the Trustees and Shareholders of
the Schwab Short/Intermediate Government Bond Fund and
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 and the financial highlights 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, 1996, the results of each of their operations, the changes in each
of their net assets and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "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, 1996 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
28
<PAGE> 33
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio with one investment in any of our three
asset allocation funds, choose from several equity markets with our equity
funds, or diversify your portfolio across asset classes and fund management
styles with our OneSource Portfolios. You can also select from different
maturities with our bond fund choices, and take advantage of an array of money
market funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab Asset Director(R)--High Growth Fund
Schwab Asset Director--Balanced Growth Fund
Schwab Asset Director--Conservative Growth Fund
SCHWAB EQUITY FUNDS
Schwab Analytics Fund(TM)
Schwab 1000 Fund(R)
Schwab International Index Fund(TM)
Schwab Small-Cap Index Fund(R)
Schwab S&P 500 Fund
SCHWAB FUND OF FUNDS 1
Schwab OneSource Portfolios--International
Schwab OneSource Portfolios--Growth Allocation 2
Schwab OneSource Portfolios--Balanced Allocation 2
SCHWAB BOND FUNDS
Schwab Government Bond Funds--Long-Term
and Short/Intermediate
Schwab Tax-Free Bond Funds--Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds--Long-Term
and Short/Intermediate
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds 3 that seek high current income
with safety and liquidity. Choose from taxable or tax-exempt alternatives. Many
can be linked to your Schwab account to "sweep" cash balances automatically when
you're between investments. Or, for your larger cash reserves, choose one of our
Value Advantage Investments(TM).
Please call 1-800-2 NO-LOAD for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including charges and
expenses. Please read it carefully before investing.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
1. Funds that invest primarily in other mutual funds.
2. In subscription until November 15, 1996, unless the subscription period is
extended, at an introductory share price of $10. After that date the share
price will fluctuate.
3. Investments in money market funds are neither insured nor guaranteed by
the U.S. government, and there is no assurance that the Funds will be able
to maintain a stable share price of $1.
<PAGE> 34
[SCHWAB FUNDS FAMILY(R) LOGO] BULK RATE
101 Montgomery Street U.S. POSTAGE
San Francisco, California 94104 PAID
CHARLES SCHWAB
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(C)1996 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
TF4265R(9/96) CRS 10552 Printed on recycled paper.
