<PAGE> 1
SCHWABFUNDS(R)
SCHWAB
GOVERNMENT
BOND FUNDS
Annual Report
August 31, 1997
<PAGE> 2
[Photo of Dear Shareholder,
Charles Schwab]
With the support of investors like you, SchwabFunds(R)
continues to be among the largest and fastest-growing mutual
fund families in the nation. Charles Schwab Investment
Management, Inc. (CSIM) now manages over $50 billion in assets
for more than 2.5 million SchwabFunds shareholders and offers
31 funds spanning a spectrum of financial markets and
investing styles.
ENHANCING CHANNELS OF COMMUNICATION
We believe that an important part of serving your needs is keeping
you informed about your investments. This report, for example, contains
performance and financial data on your fund as well as an analysis of market
trends during the reporting period and the impact of those trends on our
portfolio management strategy. This is just one way we hope to keep
communication open between you and the people managing your investments.
In addition, if you're among the millions of people exploring the Internet, I
encourage you to visit our Web site at WWW.SCHWAB.COM/SCHWABFUNDS, where you'll
find a wealth of information -- including monthly commentaries on market
conditions from our SchwabFunds portfolio managers.
NEW INVESTMENT OPPORTUNITIES
In our ongoing commitment to provide additional investment opportunities, we
recently introduced Schwab OneSource Portfolios - Small Company Fund -- a
professionally managed portfolio of small company mutual funds in one convenient
investment. If you're looking for an easy, cost-effective way to tap into the
growth potential of small companies, this fund may be an appropriate investment
for you. For a free prospectus which contains more information including fees
and expenses, please call our toll-free line at 1-800-435-4000. Please be sure
to read the prospectus before investing.
Thank you for placing your trust in SchwabFunds. We will continue to explore new
strategies to help meet your investment needs and to provide you with timely
information on SchwabFunds.
/s/ Charles R. Schwab
---------------------
Charles R. Schwab
<PAGE> 3
Make Your
Money Work
Harder!
Use this envelope to easily add
to your Schwab Bond Fund.
Charles Schwab
<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 easily add to your investment by using this convenient Schwab
investment coupon. 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 attached
postage-paid envelope.
- ---------------------------------------------
NAME
$
- ---------------------------------------------
AMOUNT OF INVESTMENT*
X
- ---------------------------------------------
SIGNATURE
/ / Check here if you would like more investment coupons for future use.
/ / Check here if you would like more information on Schwab's Automatic
Investment Plan (AIP).
*THIS ENVELOPE MAY NOT BE USED FOR INITIAL INVESTMENTS. SUBSEQUENT INVESTMENT
MINIMUM IS $100.
(c) 1997 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE.
Printed on recycled paper. TF5009(9/97) CRS 20155
- ---------------------------------------------
SCHWAB ACCOUNT NUMBER
PLEASE INDICATE INTO WHICH SCHWAB BOND FUND YOUR MONEY SHOULD BE INVESTED.
THIS ENVELOPE MAY ONLY BE USED FOR PURCHASES OF FUNDS WHICH YOU ALREADY OWN
AND FOR WHICH YOU HAVE A CURRENT PROSPECTUS.
/ / Schwab Long-Term Government Bond Fund
/ / Schwab Short/Intermediate Government Bond Fund
/ / Schwab California Long-Term Tax-Free Bond Fund
/ / Schwab California Short/Intermediate Tax-Free Bond Fund
/ / Schwab Long-Term Tax-Free Fund
/ / Schwab Short/Intermediate Tax-Free Fund
IF NO FUND IS INDICATED, YOUR INVESTMENT WILL GO INTO THE SWEEP MONEY FUND
YOU'VE DESIGNATED IN YOUR SCHWAB ACCOUNT.
(Lift here for more information.)
<PAGE> 5
CHARLES SCHWAB
JUST FOLLOW THESE EASY STEPS:
1. Fill out the Schwab investment coupon completely, including your name,
account number, signature and the amount of your check. Please use a separate
coupon for each account.
2. Make your check payable to CHARLES SCHWAB & CO., INC., and enclose your check
with the completed coupon in this postage-paid envelope.
3. Then just drop your Schwab Bond Fund investment envelope in the mail
today--and start putting your money to work! If you have any questions, don't
hesitate to call your local Schwab office or 1-800-435-4000.
THIS ENVELOPE MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT SCHWAB BOND FUND
PROSPECTUS. 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> 6
Attn: Dept. AIP 333-4
----------------
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> 7
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
A WORD FROM SCHWABFUNDS(R) .................................. 2
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND............... 3
SCHWAB LONG-TERM GOVERNMENT BOND FUND ....................... 5
THE PORTFOLIO MANAGER ....................................... 7
MARKET OVERVIEW ............................................. 8
QUESTIONS TO THE PORTFOLIO MANAGER .......................... 14
FINANCIAL STATEMENTS AND NOTES .............................. 17
</TABLE>
1
<PAGE> 8
A WORD FROM SCHWABFUNDS(R)
We are pleased to bring you the annual report for Schwab Short/Intermediate
Government Bond Fund and Schwab Long-Term Government Bond Fund (the Funds) for
the year ended August 31, 1997.
During the reporting period, the Funds achieved their primary objectives of
providing a high level of current income consistent with preservation of
capital. The chart below shows the income dividends on a per share basis paid by
each Fund during each fiscal year or period since inception.
Income Dividends per Share
[Bar Chart]
<TABLE>
<CAPTION>
Label A B
- -----------------------------------------------------------
<S> <C> <C> <C>
Label SI LT
- -----------------------------------------------------------
1 1991* 0.1 0
- -----------------------------------------------------------
2 1992 0.6 0
- -----------------------------------------------------------
3 1993** 0.37 0.31
- -----------------------------------------------------------
4 1994 0.54 0.6
- -----------------------------------------------------------
5 1995 0.59 0.69
- -----------------------------------------------------------
6 1996 0.59 0.65
- -----------------------------------------------------------
7 1997 0.59 0.65
- -----------------------------------------------------------
</TABLE>
Fiscal Year
[ ] Schwab Short/Intermediate Government Bond Fund
[ ] Schwab Long-Term Government Bond Fund
*Period from inception (11/5/91) through 12/31/91.
**Period from inception (3/5/93) through 8/31/93 for Schwab Long-Term Government
Bond Fund and for the eight-month period ended 8/31/93 for Schwab Short/
Intermediate Government Bond Fund.
2
<PAGE> 9
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
The Fund invests primarily in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements
covering these securities. Under normal market conditions, the Fund seeks to
maintain a dollar weighted average portfolio maturity not to exceed five years.
The chart below represents the Fund's portfolio as of 8/31/97. This information
is not necessarily indicative of the Fund's future holdings. A complete detailed
list of the Fund's investments, also as of 8/31/97, is located in the Schedule
of Investments section later in this report.
[Pie Chart]
Agency Obligations 38%
CMOs 6%
Cash Equivalents 1%
U.S. Treasury Obligations 55%
The chart on the following page compares the growth of a $10,000 investment in
the Fund, made at inception, with a similar investment in the Lehman Brothers
Mutual Fund Short (1-3 Year) U.S. Government Index (Lehman Short Gov't. Index).
THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. 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. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
3
<PAGE> 10
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN SCHWAB SHORT/INTERMEDIATE
GOVERNMENT BOND FUND AND LEHMAN SHORT GOV'T. INDEX
[ ] Schwab Short/Intermediate Government Bond Fund
[ ] Lehman Short Gov't. Index
[Line Graph]
Label A B
- ---------------------------------------------------------------------
Label Schwab Short/
Intermediate Lehman Short
Government Bond Fund Gov't. Index
- ---------------------------------------------------------------------
1 Nov 5, 91 10000 10000
2 Nov-91 10117 10059
3 Dec-91 10381 10212
4 Jan-92 10241 10199
5 Feb-92 10240 10229
6 Mar-92 10190 10226
7 Apr-92 10282 10319
8 May-92 10440 10415
9 Jun-92 10595 10521
10 Jul-92 10794 10642
11 Aug-92 10898 10728
12 Sep-92 11053 10829
13 Oct-92 10924 10767
14 Nov-92 10868 10751
15 Dec-92 11012 10851
16 Jan-93 11202 10965
17 Feb-93 11355 11052
18 Mar-93 11395 11087
19 Apr-93 11499 11154
20 May-93 11462 11128
21 Jun-93 11622 11211
22 Jul-93 11661 11236
23 Aug-93 11823 11329
24 Sep-93 11851 11365
25 Oct-93 11892 11390
26 Nov-93 11819 11392
27 Dec-93 11873 11438
28 Jan-94 11973 11509
29 Feb-94 11780 11439
30 Mar-94 11628 11380
31 Apr-94 11527 11337
32 May-94 11485 11353
33 Jun-94 11500 11381
34 Jul-94 11599 11484
35 Aug-94 11628 11522
36 Sep-94 11585 11495
37 Oct-94 11593 11522
38 Nov-94 11528 11473
39 Dec-94 11540 11495
40 Jan-95 11697 11654
41 Feb-95 11852 11815
42 Mar-95 11919 11883
43 Apr-95 12018 11989
44 May-95 12232 12197
45 Jun-95 12281 12263
46 Jul-95 12308 12314
47 Aug-95 12396 12388
48 Sep-95 12470 12449
49 Oct-95 12572 12552
50 Nov-95 12696 12659
51 Dec-95 12799 12754
52 Jan-96 12900 12862
53 Feb-96 12817 12812
54 Mar-96 12778 12803
55 Apr-96 12776 12816
56 May-96 12777 12844
57 Jun-96 12878 12938
58 Jul-96 12917 12988
59 Aug-96 12940 13036
60 Sep-96 13072 13155
61 Oct-96 13235 13304
62 Nov-96 13368 13402
63 Dec-96 13311 13405
64 Jan-97 13378 13469
65 Feb-97 13397 13501
66 Mar-97 13355 13491
67 Apr-97 13477 13601
68 May-97 13575 13698
69 Jun-97 13680 13791
70 Jul-97 13874 13941
71 Aug-97 13841 13955
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 8/31/97
<TABLE>
<CAPTION>
1 Yr. 5 Yr. Since 30-Day Value of a
Inception 1 SEC Yield $10,000 Investment
=====================================================================================================
<S> <C> <C> <C> <C> <C>
Schwab Short/Intermediate
Government Bond Fund 2 6.96% 4.90% 5.74% 5.78% $13,841
- -----------------------------------------------------------------------------------------------------
Lehman Short
Gov't. Index 7.05% 5.40% 5.89% - $13,955
=====================================================================================================
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 6/30/97
<TABLE>
<CAPTION>
1 Yr. 5 Yr. Since 30-Day
Inception 1 SEC Yield
=====================================================================================================
<S> <C> <C> <C> <C>
Schwab Short/Intermediate
Government Bond Fund 2 6.23% 5.24% 5.70% 5.87%
=====================================================================================================
</TABLE>
1 Inception date was 11/5/91.
2 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%. This guarantee can be discontinued at any time. Without fee
waivers and guarantees, as of 8/31/97, the Fund's 30-day SEC yield and average
annual one-year, five-year, and since inception total returns would have been
5.42%, 6.61%, 4.61%, and 5.39%, respectively. Without fee waivers and
guarantees, as of 6/30/97, the Fund's 30-day SEC yield and average annual
one-year, five-year, and since inception total returns would have been 5.50%,
5.88%, 4.95%, and 5.35%, respectively.
4
<PAGE> 11
SCHWAB LONG-TERM GOVERNMENT BOND FUND
The Fund invests primarily in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and repurchase agreements
covering these securities. Under normal market conditions, the Fund seeks to
maintain a dollar weighted average portfolio maturity which is generally greater
than ten years.
The chart below represents the Fund's portfolio as of 8/31/97. This information
is not necessarily indicative of the Fund's future holdings. A complete detailed
list of the Fund's investments, also as of 8/31/97, is located in the Schedule
of Investments section later in this report.
[Pie Chart]
Agency Obligations 65%
Cash Equivalents 1%
U.S. Treasury Obligations 34%
The chart on the following page compares the growth of a $10,000 investment in
the Fund, made at inception, with a similar investment in the Lehman Brothers
U.S. Government Bond Index (Lehman Gov't. Bond Index). THIS INFORMATION IS
HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. 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. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
5
<PAGE> 12
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN SCHWAB LONG-TERM GOVERNMENT
BOND FUND AND LEHMAN GOV'T. BOND INDEX
[ ] Schwab Long-Term Government Bond Fund
[ ] Lehman Gov't. Bond Index
[Line Graph]
<TABLE>
<CAPTION>
Label A B
- ----------------------------------------------------
Label Schwab Long-Term Lehman Govt. Bond
Government Bond Fund Index
- ----------------------------------------------------
<S> <C> <C> <C>
1 Mar 5, 93 10000 10000
2 Apr-93 9890 10077
3 May-93 9927 10066
4 Jun-93 10314 10289
5 Jul-93 10441 10352
6 Aug-93 10863 10583
7 Sep-93 10901 10623
8 Oct-93 10952 10664
9 Nov-93 10688 10546
10 Dec-93 10738 10587
11 Jan-94 10938 10732
12 Feb-94 10544 10505
13 Mar-94 10220 10269
14 Apr-94 10112 10187
15 May-94 10060 10174
16 Jun-94 10027 10151
17 Jul-94 10239 10338
18 Aug-94 10233 10340
19 Sep-94 10005 10194
20 Oct-94 10036 10187
21 Nov-94 10031 10168
22 Dec-94 10122 10230
23 Jan-95 10347 10421
24 Feb-95 10648 10645
25 Mar-95 10718 10712
26 Apr-95 10887 10852
27 May-95 11429 11289
28 Jun-95 11445 11376
29 Jul-95 11348 11334
30 Aug-95 11566 11467
31 Sep-95 11711 11577
32 Oct-95 11931 11753
33 Nov-95 12173 11936
34 Dec-95 12395 12106
35 Jan-96 12438 12180
36 Feb-96 12075 11931
37 Mar-96 11934 11832
38 Apr-96 11766 11756
39 May-96 11722 11736
40 Jun-96 11885 11888
41 Jul-96 11890 11918
42 Aug-96 11830 11891
43 Sep-96 12112 12089
44 Oct-96 12451 12355
45 Nov-96 12763 12570
46 Dec-96 12537 12441
47 Jan-97 12533 12455
48 Feb-97 12556 12473
49 Mar-97 12353 12340
50 Apr-97 12606 12518
51 May-97 12732 12626
52 Jun-97 12918 12767
53 Jul-97 13363 13130
54 Aug-97 13152 13000
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 8/31/97
<TABLE>
<CAPTION>
1 Yr. Since 30-Day Value of a
Inception 3 SEC Yield $10,000 Investment
=============================================================================================
<S> <C> <C> <C> <C>
Schwab Long-Term
Government Bond Fund 4 11.18% 6.28% 6.61% $13,152
- ---------------------------------------------------------------------------------------------
Lehman Gov't.
Bond Index 9.32% 6.01% - $13,000
=============================================================================================
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 6/30/97
<TABLE>
<CAPTION>
1 Yr. Since 30-Day
Inception 3 SEC Yield
=============================================================================================
<S> <C> <C> <C>
Schwab Long-Term
Government Bond Fund 4 8.69% 6.10% 6.76%
=============================================================================================
</TABLE>
3 Inception date was 3/5/93.
4 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 0.30%. This guarantee can be discontinued at any time. Without fee
waivers and guarantees, as of 8/31/97, the Fund's 30-day SEC yield and average
annual one-year and since inception total returns would have been 5.60%, 10.10%,
and 3.91%, respectively. Without fee waivers and guarantees, as of 6/30/97, the
Fund's 30-day SEC yield and average annual one-year and since inception total
returns would have been 5.67%, 7.52%, and 3.67%, respectively.
6
<PAGE> 13
THE PORTFOLIO MANAGER
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.
7
<PAGE> 14
MARKET OVERVIEW
Real GDP Growth Rate
<TABLE>
<CAPTION>
Label A
- -------------------------------------
Label Real GDP
- -------------------------------------
<S> <C> <C>
1 Q1 1990 0.041
2 Q2 1990 0.013
3 Q3 1990 -0.019
4 Q4 1990 -0.041
5 Q1 1991 -0.022
6 Q2 1991 0.017
7 Q3 1991 0.01
8 Q4 1991 0.01
9 Q1 1992 0.047
10 Q2 1992 0.025
11 Q3 1992 0.03
12 Q4 1992 0.043
13 Q1 1993 -0.001
14 Q2 1993 0.019
15 Q3 1993 0.023
16 Q4 1993 0.048
17 Q1 1994 0.025
18 Q2 1994 0.049
19 Q3 1994 0.035
20 Q4 1994 0.03
21 Q1 1995 0.004
22 Q2 1995 0.007
23 Q3 1995 0.038
24 Q4 1995 0.003
25 Q1 1996 0.02
26 Q2 1996 0.047
27 Q3 1996 0.021
28 Q4 1996 0.038
29 Q1 1997 0.049
30 Q2 1997 0.033
</TABLE>
Source: Bloomberg L.P.
- - The economy, as measured by the growth of real GDP, continues to expand at a
healthy rate. The real GDP growth rate was 3.2% for the 1996 calendar year
and 4.1% for the first six months of 1997.
- - The apparent strength of the economy and the tight labor markets (refer to
the next graph) continue to lead to speculation regarding the potential
impact on future inflation and whether more restrictive Federal Reserve
policy is imminent. The Federal Reserve has indicated that it is "on alert"
for signs of accelerating inflation caused by either tight labor markets or
by consumer spending fueled by a strong stock market.
- - At the time of this writing, the economy appears poised for growth,
continuing the current economic expansion which began in 1991.
8
<PAGE> 15
U.S. Unemployment Rate
<TABLE>
<CAPTION>
Label A
- --------------------------------------
Label Unemployment Rate
- --------------------------------------
<S> <C> <C>
1 Jan-90 0.053
2 Feb-90 0.053
3 Mar-90 0.052
4 Apr-90 0.054
5 May-90 0.053
6 Jun-90 0.051
7 Jul-90 0.054
8 Aug-90 0.056
9 Sep-90 0.057
10 Oct-90 0.058
11 Nov-90 0.06
12 Dec-90 0.062
13 Jan-91 0.063
14 Feb-91 0.065
15 Mar-91 0.068
16 Apr-91 0.066
17 May-91 0.068
18 Jun-91 0.068
19 Jul-91 0.067
20 Aug-91 0.068
21 Sep-91 0.068
22 Oct-91 0.069
23 Nov-91 0.069
24 Dec-91 0.071
25 Jan-92 0.071
26 Feb-92 0.073
27 Mar-92 0.073
28 Apr-92 0.073
29 May-92 0.074
30 Jun-92 0.077
31 Jul-92 0.076
32 Aug-92 0.076
33 Sep-92 0.075
34 Oct-92 0.074
35 Nov-92 0.073
36 Dec-92 0.073
37 Jan-93 0.071
38 Feb-93 0.07
39 Mar-93 0.07
40 Apr-93 0.07
41 May-93 0.069
42 Jun-93 0.069
43 Jul-93 0.068
44 Aug-93 0.067
45 Sep-93 0.067
46 Oct-93 0.067
47 Nov-93 0.065
48 Dec-93 0.064
49 Jan-94 0.067
50 Feb-94 0.066
51 Mar-94 0.065
52 Apr-94 0.064
53 May-94 0.06
54 Jun-94 0.06
55 Jul-94 0.061
56 Aug-94 0.061
57 Sep-94 0.059
58 Oct-94 0.056
59 Nov-94 0.056
60 Dec-94 0.054
61 Jan-95 0.056
62 Feb-95 0.054
63 Mar-95 0.058
64 Apr-95 0.057
65 May-95 0.057
66 Jun-95 0.056
67 Jul-95 0.057
68 Aug-95 0.053
69 Sep-95 0.056
70 Oct-95 0.055
71 Nov-95 0.056
72 Dec-95 0.056
73 Jan-96 0.058
74 Feb-96 0.055
75 Mar-96 0.056
76 Apr-96 0.054
77 May-96 0.056
78 Jun-96 0.053
79 Jul-96 0.054
80 Aug-96 0.051
81 Sep-96 0.052
82 Oct-96 0.052
83 Nov-96 0.053
84 Dec-96 0.053
85 Jan-97 0.054
86 Feb-97 0.053
87 Mar-97 0.052
88 Apr-97 0.049
89 May-97 0.048
90 Jun-97 0.05
91 Jul-97 0.048
92 Aug-97 0.049
</TABLE>
Source: Bloomberg L.P.
- - The unemployment rate during 1996 remained near its lowest point for the
decade. This declining trend continued into 1997, with the May and July rates
of 4.8% representing the lowest rates since December 1973.
- - Low unemployment rates typically lead many economists to question whether
continued low levels of unemployment can persist without generating
inflationary pressures on wages and ultimately, prices.
9
<PAGE> 16
Measures of Inflation
[ ] Quarterly Employment Cost Index
[ ] Monthly Consumer Price Index
<TABLE>
<CAPTION>
Label A
- ---------------------------------------
Label Monthly Consumer
Price Index
- ---------------------------------------
<S> <C> <C>
1 Jan-90 0.052
2 Feb-90 0.053
3 Mar-90 0.052
4 Apr-90 0.047
5 May-90 0.044
6 Jun-90 0.047
7 Jul-90 0.048
8 Aug-90 0.056
9 Sep-90 0.062
10 Oct-90 0.063
11 Nov-90 0.063
12 Dec-90 0.061
13 Jan-91 0.057
14 Feb-91 0.053
15 Mar-91 0.049
16 Apr-91 0.049
17 May-91 0.05
18 Jun-91 0.047
19 Jul-91 0.044
20 Aug-91 0.038
21 Sep-91 0.034
22 Oct-91 0.029
23 Nov-91 0.03
24 Dec-91 0.031
25 Jan-92 0.026
26 Feb-92 0.028
27 Mar-92 0.032
28 Apr-92 0.032
29 May-92 0.03
30 Jun-92 0.031
31 Jul-92 0.032
32 Aug-92 0.031
33 Sep-92 0.03
34 Oct-92 0.032
35 Nov-92 0.03
36 Dec-92 0.029
37 Jan-93 0.033
38 Feb-93 0.032
39 Mar-93 0.031
40 Apr-93 0.032
41 May-93 0.032
42 Jun-93 0.03
43 Jul-93 0.028
44 Aug-93 0.028
45 Sep-93 0.027
46 Oct-93 0.028
47 Nov-93 0.027
48 Dec-93 0.027
49 Jan-94 0.025
50 Feb-94 0.025
51 Mar-94 0.025
52 Apr-94 0.024
53 May-94 0.023
54 Jun-94 0.025
55 Jul-94 0.028
56 Aug-94 0.029
57 Sep-94 0.03
58 Oct-94 0.026
59 Nov-94 0.027
60 Dec-94 0.027
61 Jan-95 0.028
62 Feb-95 0.029
63 Mar-95 0.029
64 Apr-95 0.031
65 May-95 0.032
66 Jun-95 0.03
67 Jul-95 0.028
68 Aug-95 0.026
69 Sep-95 0.025
70 Oct-95 0.028
71 Nov-95 0.026
72 Dec-95 0.025
73 Jan-96 0.027
74 Feb-96 0.027
75 Mar-96 0.028
76 Apr-96 0.029
77 May-96 0.029
78 Jun-96 0.028
79 Jul-96 0.03
80 Aug-96 0.029
81 Sep-96 0.03
82 Oct-96 0.03
83 Nov-96 0.033
84 Dec-96 0.033
85 Jan-97 0.03
86 Feb-97 0.03
87 Mar-97 0.028
88 Apr-97 0.025
89 May-97 0.022
90 Jun-97 0.023
91 Jul-97 0.022
92 Aug-97 0.022
</TABLE>
<TABLE>
<CAPTION>
Label A
- -------------------------------------------
Label Quarterly Employment
Cost Index
- -------------------------------------------
<S> <C> <C>
1 Jan-90 0.053
2 Feb-90 0.053
3 Mar-90 0.053
4 Apr-90 0.054
5 May-90 0.054
6 Jun-90 0.054
7 Jul-90 0.051
8 Aug-90 0.051
9 Sep-90 0.051
10 Oct-90 0.048
11 Nov-90 0.048
12 Dec-90 0.048
13 Jan-91 0.046
14 Feb-91 0.046
15 Mar-91 0.046
16 Apr-91 0.045
17 May-91 0.045
18 Jun-91 0.045
19 Jul-91 0.043
20 Aug-91 0.043
21 Sep-91 0.043
22 Oct-91 0.042
23 Nov-91 0.042
24 Dec-91 0.042
25 Jan-92 0.041
26 Feb-92 0.041
27 Mar-92 0.041
28 Apr-92 0.035
29 May-92 0.035
30 Jun-92 0.035
31 Jul-92 0.034
32 Aug-92 0.034
33 Sep-92 0.034
34 Oct-92 0.035
35 Nov-92 0.035
36 Dec-92 0.035
37 Jan-93 0.034
38 Feb-93 0.034
39 Mar-93 0.034
40 Apr-93 0.036
41 May-93 0.036
42 Jun-93 0.036
43 Jul-93 0.036
44 Aug-93 0.036
45 Sep-93 0.036
46 Oct-93 0.034
47 Nov-93 0.034
48 Dec-93 0.034
49 Jan-94 0.032
50 Feb-94 0.032
51 Mar-94 0.032
52 Apr-94 0.031
53 May-94 0.031
54 Jun-94 0.031
55 Jul-94 0.031
56 Aug-94 0.031
57 Sep-94 0.031
58 Oct-94 0.03
59 Nov-94 0.03
60 Dec-94 0.03
61 Jan-95 0.03
62 Feb-95 0.03
63 Mar-95 0.03
64 Apr-95 0.03
65 May-95 0.03
66 Jun-95 0.03
67 Jul-95 0.028
68 Aug-95 0.028
69 Sep-95 0.028
70 Oct-95 0.028
71 Nov-95 0.028
72 Dec-95 0.028
73 Jan-96 0.029
74 Feb-96 0.029
75 Mar-96 0.029
76 Apr-96 0.029
77 May-96 0.029
78 Jun-96 0.029
79 Jul-96 0.029
80 Aug-96 0.029
81 Sep-96 0.029
82 Oct-96 0.03
83 Nov-96 0.03
84 Dec-96 0.03
85 Jan-97 0.028
86 Feb-97 0.028
87 Mar-97 0.028
88 Apr-97 0.028
89 May-97 0.028
90 Jun-97 0.028
91 Jul-97 0.030
92 Aug-97 0.030
</TABLE>
Source: Bloomberg L.P.
- - Both the Employment Cost Index and Consumer Price Index (CPI) remained in
check throughout the first half of 1997, reflecting continued low levels of
inflation.
- - For the twelve months ended August 1997, the CPI rose 2.2%, the lowest rate
since February 1987. Its core rate (which excludes the more volatile food and
energy components) rose 2.3%, the lowest rate since 1965.
- - The Federal Reserve has indicated that the economy remains at risk to
inflation and that it is poised to act preemptively by raising interest rates
if necessary. The Federal Reserve did take action in March, increasing the
Federal Funds Rate by 0.25% to 5.50%, yet left interest rates unchanged at
the recent July 1997 Federal Open Market Committee meeting.
10
<PAGE> 17
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<TABLE>
<CAPTION>
Label A B C D
- --------------------------------------------------------------------------------------------------
Label S&P 500 Schwab Small-Cap Schwab Lehman Brothers General
Index Index International Index U.S. Gov't Index
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 1 1 1 1
2 Sep-96 1.056 1.037 1.029 1.017
3 Oct-96 1.085 1.019 1.026 1.039
4 Nov-96 1.167 1.06 1.074 1.057
5 Dec-96 1.144 1.079 1.064 1.046
6 Jan-97 1.216 1.105 1.029 1.047
7 Feb-97 1.225 1.078 1.046 1.049
8 Mar-97 1.175 1.025 1.053 1.038
9 Apr-97 1.245 1.028 1.064 1.053
10 May-97 1.321 1.154 1.142 1.062
11 Jun-97 1.38 1.214 1.209 1.074
12 Jul-97 1.49 1.283 1.242 1.104
13 Aug-97 1.404 1.312 1.152 1.093
</TABLE>
[ ] Schwab Small-Cap Index(R) [ ] S&P 500(R) Index
[ ] Schwab International Index(R) [ ] Lehman Brothers General U.S. Gov't. Index
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
are representative returns of specific market sectors during the reporting
period and do not reflect performance of any fund. Indices are unmanaged and,
unlike a fund, do not reflect the payment of advisory fees and other expenses
associated with an investment in a fund. Investors cannot invest in an index
directly.
- - Despite a 5.6% correction in August, large-cap domestic stocks, as
represented by the S&P 500 Index, continued to be the strongest performing
asset class, achieving a 40.6% return during the one-year reporting period
ended August 31, 1997.
- - As represented by the 31.2% return of the Schwab Small-Cap Index, small-cap
stocks also achieved very strong returns during the reporting period, well in
excess of their long-term averages.
- - International stocks, as represented by the Schwab International Index,
achieved a return of 15.2% for the reporting period, following a correction
of 7.2% during August which was led by Asian markets.
- - U.S. Government bonds, as represented by the Lehman Brothers General U.S.
Government Index, achieved a return of 9.3% for the one-year reporting
period.
11
<PAGE> 18
S&P 500(R) Price/Earnings Ratio
<TABLE>
<CAPTION>
Label A
- ------------------------------------------------------
Label S&P 500 Price/Earnings Ratio
- ------------------------------------------------------
<S> <C> <C>
1 Jan-90 14.37
2 Feb-90 14.21
3 Mar-90 14.77
4 Apr-90 14.82
5 May-90 15.84
6 Jun-90 16.66
7 Jul-90 16.65
8 Aug-90 15.57
9 Sep-90 14.9
10 Oct-90 14.36
11 Nov-90 14.59
12 Dec-90 15.19
13 Jan-91 14.95
14 Feb-91 16.82
15 Mar-91 17.48
16 Apr-91 17.85
17 May-91 17.92
18 Jun-91 17.96
19 Jul-91 18.07
20 Aug-91 19.72
21 Sep-91 19.88
22 Oct-91 19.92
23 Nov-91 21.02
24 Dec-91 21.85
25 Jan-92 23.35
26 Feb-92 23.83
27 Mar-92 25.45
28 Apr-92 25.51
29 May-92 25.71
30 Jun-92 25.08
31 Jul-92 25.61
32 Aug-92 25.5
33 Sep-92 24.37
34 Oct-92 23.94
35 Nov-92 24.08
36 Dec-92 24.01
37 Jan-93 24.2
38 Feb-93 24.25
39 Mar-93 24.22
40 Apr-93 23.2
41 May-93 23.21
42 Jun-93 22.58
43 Jul-93 22.52
44 Aug-93 23.02
45 Sep-93 23.74
46 Oct-93 23.97
47 Nov-93 22.55
48 Dec-93 23.55
49 Jan-94 22.98
50 Feb-94 21.17
51 Mar-94 20.34
52 Apr-94 20.1
53 May-94 20.16
54 Jun-94 19.76
55 Jul-94 18.64
56 Aug-94 18.9
57 Sep-94 18.26
58 Oct-94 17.55
59 Nov-94 16.58
60 Dec-94 16.98
61 Jan-95 16.23
62 Feb-95 16.2
63 Mar-95 16.5
64 Apr-95 16.02
65 May-95 16.43
66 Jun-95 16.82
67 Jul-95 16.55
68 Aug-95 16.18
69 Sep-95 16.86
70 Oct-95 16.18
71 Nov-95 17.14
72 Dec-95 17.41
73 Jan-96 18.11
74 Feb-96 18.56
75 Mar-96 18.94
76 Apr-96 19.16
77 May-96 19.48
78 Jun-96 19.3
79 Jul-96 18.31
80 Aug-96 18.62
81 Sep-96 19.75
82 Oct-96 19.6
83 Nov-96 21.05
84 Dec-96 20.7
85 Jan-97 20.55
86 Feb-97 20.98
87 Mar-97 19.87
88 Apr-97 20.24
89 May-97 21.43
90 Jun-97 22.45
91 Jul-97 23.92
92 Aug-97 22.64
</TABLE>
Source: Bloomberg L.P.
- - The price/earnings ratio for the S&P 500 was 22.6 at the close of the
reporting period, well above its 30-year average of 14.7.
- - Based on other traditional measures such as the price-to-book value ratio or
dividend yield, the U.S. stock market valuation, as measured by the S&P 500,
reached historical highs during the reporting period.
- - Although low inflation and interest rates, as well as strong flows into
mutual funds, have helped the U.S. equity markets reach such levels, Federal
Reserve Chairman Greenspan has warned that current stock market values make
sense only if the outlook for corporate earnings growth remains positive, an
assumption which should be widely debated by market participants.
12
<PAGE> 19
30-Year and 5-Year Treasury Bond Yields
<TABLE>
<CAPTION>
Label A B
- -----------------------------------------------------------------------
Label 30-Year Treasury 5-Year Treasury
Bond Yield Bond Yield
- -----------------------------------------------------------------------
<S> <C> <C> <C>
1 Sep 6, 96 0.0711 0.067
2 Sep 13, 96 0.0695 0.0647
3 Sep 20, 96 0.0704 0.0662
4 Sep 27, 96 0.0691 0.0644
5 Oct 4, 96 0.0674 0.0621
6 Oct 11, 96 0.0685 0.0628
7 Oct 18, 96 0.068 0.0625
8 Oct 25, 96 0.0682 0.0626
9 Nov 1, 96 0.0668 0.0611
10 Nov 8, 96 0.0651 0.0603
11 Nov 15, 96 0.0646 0.0596
12 Nov 22, 96 0.0644 0.0593
13 Nov 29, 96 0.0635 0.0583
14 Dec 6, 96 0.0651 0.0599
15 Dec 13, 96 0.0657 0.0605
16 Dec 20, 96 0.0661 0.0614
17 Dec 27, 96 0.0656 0.0608
18 Jan 3, 97 0.0673 0.0627
19 Jan 10, 97 0.0685 0.0638
20 Jan 17, 97 0.0682 0.0631
21 Jan 24, 97 0.0689 0.0639
22 Jan 31, 97 0.0679 0.0625
23 Feb 7, 97 0.067 0.0615
24 Feb 14, 97 0.0652 0.0606
25 Feb 21, 97 0.0664 0.0616
26 Feb 28, 97 0.068 0.0639
27 Mar 7, 97 0.0681 0.0637
28 Mar 14, 97 0.0694 0.0652
29 Mar 21, 97 0.0697 0.0662
30 Mar 28, 97 0.0709 0.0678
31 Apr 4, 97 0.0712 0.0676
32 Apr 11, 97 0.0717 0.0684
33 Apr 18, 97 0.0705 0.0671
34 Apr 25, 97 0.0714 0.0684
35 May 2, 97 0.0687 0.0651
36 May 9, 97 0.0689 0.0652
37 May 16, 97 0.069 0.0655
38 May 23, 97 0.0699 0.0658
39 May 30, 97 0.0691 0.065
40 Jun 6, 97 0.0677 0.0637
41 Jun 13, 97 0.0672 0.0625
42 Jun 20, 97 0.0666 0.0627
43 Jun 27, 97 0.0674 0.0633
44 Jul 4, 97 0.0663 0.0619
45 Jul 11, 97 0.0653 0.0612
46 Jul 18, 97 0.0653 0.0614
47 Jul 25, 97 0.0645 0.0608
48 Aug 1, 97 0.0645 0.0607
49 Aug 8, 97 0.0664 0.0622
50 Aug 15, 97 0.0655 0.0606
51 Aug 22, 97 0.0665 0.0619
52 Aug 29, 97 0.0661 0.0622
</TABLE>
[ ] 30-Year Treasury Bond Yield
[ ] 5-Year Treasury Bond Yield
Source: Bloomberg L.P.
- - Although bond yields moved within a fairly narrow trading range throughout
most of the reporting period, they were heavily influenced by reports
indicating the relative strength of the economy.
- - Yields declined during the third and into the fourth quarter of 1996
following reports of weaker economic data and a slowing of the GDP growth
rate to 2.1% during the third quarter. The fourth quarter's lower interest
rates prompted renewed refinancing activity and consumer spending, resulting
in better employment growth, higher rates, and stronger GDP growth through
the first quarter of 1997.
- - Yields experienced another decline during the second quarter of 1997, again
in response to reports of weaker economic activity.
13
<PAGE> 20
QUESTIONS TO THE PORTFOLIO MANAGER
Q. HOW WERE THE FUNDS MANAGED DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE
TO THE PORTFOLIO?
A. SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND: The weighted average maturity
(WAM) of the Fund was extended slightly during the one-year reporting period. In
early 1997, we had shortened this Fund's WAM as stronger economic growth and
higher interest rates appeared imminent. As new data revealed that the economy
was not as strong as anticipated, lowering the risk of rising bond yields (and
therefore, falling bond prices) we moderately extended the WAM, thereby
increasing the fund's yield. The Fund's WAM at the end of the period was 2.85
years, up from 2.52 years at the beginning of the period.
SCHWAB LONG-TERM GOVERNMENT BOND FUND: In contrast to the Schwab
Short/Intermediate Government Bond Fund, we maintained the Fund's WAM at the
shorter end of this Fund's minimum range (10 years). Interest rate movements
during the reporting period were quick and volatile, primarily impacting the
long end of the market. During the reporting period, we increased the Fund's
exposure to U.S. Government agency securities and maintained a duration at the
shorter end of the permissible range for the Fund. These steps were taken to
protect the Fund against the short run price volatility which was prevalent
during this reporting period. The Fund's WAM at the end of the period was 11.05
years, up slightly from 10.98 years at the beginning of the period.
In both funds, we continue to execute a cautious strategy, carefully watching
economic indicators and monitoring Federal Reserve Bank communications regarding
the target level for short-term interest rates.
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 to help reduce overall portfolio volatility. The selection of a taxable or
tax-exempt bond fund should be a function of whether you plan to hold the fund
in a
14
<PAGE> 21
tax-deferred account (such as an IRA or 401(k) account) or not; and if not, a
function of your marginal tax bracket. Under most market conditions, tax-exempt
investments held outside of a tax-deferred account are generally more attractive
to higher tax-bracket investors.
Short/intermediate bond funds historically have offered greater price stability
in exchange for lower and somewhat more volatile yields. Conversely, funds with
longer WAMs historically have paid higher and somewhat more stable yields with
correspondingly greater price volatility. The selection of the most appropriate
fund will depend on your own degree of risk tolerance, need for income, and time
horizon. To position your 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. SINCE THE STOCK MARKET HAS ACHIEVED RECORD HIGHS, IS IT TIME TO THINK ABOUT
INCREASING MY ALLOCATION TO BONDS?
A. Whenever there has been a significant divergence between returns of asset
classes, it is prudent to review your portfolio asset allocation. For the
three-year period ended 8/31/97, total returns on large-cap domestic stocks far
exceeded those of domestic bonds. For example, Schwab 1000 Fund(R), a large-cap
domestic equity portfolio, produced an average annual total return of 25.28% for
the three-year period ended 8/31/97 while Schwab Long-Term Government Bond Fund
returned 8.73% over the same period.5 This divergence between asset class
returns can affect portfolio asset allocation over time.
As shown on the following page, if an investor had a hypothetical asset
allocation of 60% stocks and 40% bonds (investing in just these two funds) at
the beginning of the three-year period, and reinvested all fund distributions,
the asset allocation mix would have shifted to 70% stocks and 30% bonds by the
end of the period - a significant shift from the investor's original strategy
caused by the variance in returns of stocks and bonds.6
5 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 both Funds' fees during the
period. Without the waiver, each Fund's total return would have been lower.
6 Note that these are hypothetical asset allocations only.
15
<PAGE> 22
<TABLE>
<CAPTION>
-----------------------------------------------------------
8/31/94 Portfolio Three-Year 8/31/97 Portfolio
--------------------- ---------------------
Value Allocation Growth Value Allocation
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Schwab 1000 Fund(R) $ 6,000 60% $5,798 $11,798 70%
- ---------------------------------------------------------------------------------------
Schwab Long-Term
Government Bond Fund $ 4,000 40% $1,142 $ 5,142 30%
- ---------------------------------------------------------------------------------------
Total Portfolio Value $10,000 100% $6,940 $16,940 100%
- ---------------------------------------------------------------------------------------
</TABLE>
Rather than trying to time markets, we believe investors should focus on their
own risk profiles and income needs to determine the most appropriate level of
bonds in their portfolios. In addition to providing income, bonds have
performance characteristics which may make them an attractive element of a
well-diversified investment portfolio. Since bond returns have historically not
been well correlated with stock returns, combining bonds in a portfolio with
other asset classes can be an effective tool to help reduce overall portfolio
volatility. 7
Q. CAN YOU PROVIDE AN UPDATE ON THE RECENT PROXY VOTE?
A. Shareholders overwhelmingly approved all proposals, including the proposal to
amend each Fund's fundamental investment objective to change the Funds from
Government bond funds to bond index funds tracking two Lehman Brothers bond
indices. Of the shares voted, 91.7% and 89.1% were in favor of the indexing
proposal for the Short/Intermediate Government Bond Fund and the Long-Term
Government Bond Fund, respectively.
The Funds' transition from an "actively managed" strategy to an "indexing"
strategy is expected to begin on November 1, and should be complete prior to the
end of the year. Beginning with the next shareholder report, scheduled for
February 28, 1998, the Funds' performances will be discussed and compared to
their respective Lehman Brothers indices. Please refer to your proxy voting
booklet if you have additional questions regarding this change.
7 For the 20-year period ended 12/31/96 the correlation of large-cap stock
returns and government bond returns has been 0.37. Source: Symphony Asset
Management.
16
<PAGE> 23
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Change Over
as of 8/31/97 as of 8/31/96 Reporting
(000s) (000s) Period
- -----------------------------------------------
<S> <C> <C>
$ 127,460 $ 134,019 (4.9)%
- -----------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1997
<TABLE>
<CAPTION>
Maturity Value % of % of
Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months $ 11,870 9.5% 9.5%
7 - 36 Months 48,621 38.7 48.2
37 - 60 Months 64,979 51.8 100.0%
--------- ---------
$ 125,470 100.0%
========= ========
Average Weighted Maturity--2.85 Years
</TABLE>
17
<PAGE> 24
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 8/31/97 as of 8/31/96 Reporting
(000s) (000s) Period
- -----------------------------------------------
<S> <C> <C>
$24,778 $22,761 8.9%
- -----------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1997
<TABLE>
<CAPTION>
Maturity Value % of % of
Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 243 1.0% 1.0%
2 - 10 Years 18,839 77.2 78.2
11 - 20 Years 3,990 16.4 94.6
21 - 30 Years 1,314 5.4 100.0%
--------- ---------
$24,386 100.0%
======== ========
Average Weighted Maturity--11.05 Years
</TABLE>
18
<PAGE> 25
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS--54.6%(a)
U.S. Treasury Notes
7.88%, 01/15/98 $2,700 $ 2,723
7.25%, 02/15/98 2,000 2,014
5.88%, 08/15/98 2,000 2,003
6.25%, 03/31/99 3,000 3,017
6.88%, 07/31/99 8,000 8,129
6.88%, 08/31/99 5,000 5,089
7.13%, 09/30/99 5,000 5,112
5.88%, 11/15/99 1,000 998
7.75%, 12/31/99 5,000 5,187
6.75%, 04/30/00 3,000 3,050
5.88%, 06/30/00 3,000 2,986
5.63%, 02/28/01 5,000 4,922
8.00%, 05/15/01 1,900 2,013
6.63%, 06/30/01 5,000 5,074
6.38%, 09/30/01 5,000 5,031
6.25%, 10/31/01 5,000 5,007
6.63%, 03/31/02 4,000 4,062
6.63%, 04/30/02 2,000 2,031
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $68,186) 68,448
--------
AGENCY OBLIGATIONS--38.4%(a)
Federal Home Loan Bank
7.28%, 02/24/98 6,340 6,391
6.26%, 08/09/99 5,000 5,024
6.58%, 09/25/00 5,000 5,016
6.70%, 04/23/01 5,000 5,017
Federal Home Loan Mortgage Corp.
7.05%, 08/02/01 5,000 5,058
8.40%, 11/30/01 2,500 2,569
Federal National Mortgage Assoc.
6.75%, 08/24/00 5,000 5,002
6.45%, 03/26/01 5,000 5,004
6.74%, 05/07/01 9,070 9,110
--------
TOTAL AGENCY OBLIGATIONS
(Cost $47,952) 48,191
--------
</TABLE>
19
<PAGE> 26
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
CMO (PLANNED AMORTIZATION CLASS)--6.4%(a)(c)
Federal National Mortgage Assoc. Series 1992-93 GB
7.00%, 10/25/00 $5,000 $ 5,065
Federal National Mortgage Assoc. Series 1992-94 G
7.00%, 04/25/00 3,000 3,023
--------
TOTAL CMO (PLANNED AMORTIZATION CLASS)
(Cost $7,944) 8,088
--------
CASH EQUIVALENTS--0.6%(b)
Provident Institutional Funds-Fed Funds
Portfolio
5.17%, 09/07/97 743 743
--------
TOTAL CASH EQUIVALENTS
(Cost $743) 743
--------
TOTAL INVESTMENTS--100%,
(Cost $124,825) $125,470
========
</TABLE>
See accompanying Notes to Schedules of Investments.
20
<PAGE> 27
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
AGENCY OBLIGATIONS--65.3%(a)
Federal Farm Credit Bank
8.06%, 01/04/05 $ 815 $ 882
6.27%, 01/26/16 1,000 924
Federal Home Loan Bank
6.45%, 06/08/05 1,000 991
6.43%, 09/19/05 1,000 990
Federal Home Loan Mortgage Corp.
6.92%, 09/15/05 1,000 996
7.53%, 08/07/06 2,000 2,048
6.88%, 11/22/06 1,000 993
6.53%, 01/03/07 1,000 994
8.57%, 10/26/09 500 517
Federal National Mortgage Assoc.
8.50%, 02/01/05 500 523
7.88%, 02/24/05 1,135 1,224
7.94%, 09/13/06 2,750 2,818
7.03%, 10/25/06 2,000 2,017
-------
TOTAL AGENCY OBLIGATIONS
(Cost $15,699) 15,917
-------
U.S. TREASURY OBLIGATIONS--33.7%(a)
U.S. Treasury Bonds
7.25%, 05/15/16 300 318
7.50%, 11/15/16 2,050 2,231
7.13%, 02/15/23 1,250 1,314
U.S. Treasury Notes
7.00%, 07/15/06 2,250 2,339
6.50%, 10/15/06 1,000 1,006
6.63%, 05/15/07 1,000 1,018
-------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $8,029) 8,226
-------
CASH EQUIVALENTS--1.0%(b)
Provident Institutional Funds-Fed Funds Portfolio
5.17%, 09/07/97 243 243
-------
TOTAL CASH EQUIVALENTS
(Cost $243) 243
-------
TOTAL INVESTMENTS--100%,
(Cost $23,971) $24,386
=======
</TABLE>
21
<PAGE> 28
- ------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS
(a) Interest rates represent coupon rate of security.
(b) Interest rate represents the yield as of report date.
(c) Maturity dates represent average weighted maturities of the underlying
mortgage obligations.
See accompanying Notes to Financial Statements.
22
<PAGE> 29
- ------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
--------------- -----------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $124,825 and
$23,971, respectively) $125,470 $ 24,386
Interest receivable 2,072 426
Receivable from advisor -- 7
Receivable for Fund shares sold 90 21
Deferred organization costs -- 11
Prepaid expenses 12 10
Dividends receivable 4 3
-------- -------
Total assets 127,648 24,864
-------- -------
LIABILITIES
Payable for:
Dividends 120 26
Fund shares redeemed 8 8
Investment advisory and administration
fee 1 --
Other 59 52
-------- -------
Total liabilities 188 86
-------- -------
Net assets applicable to outstanding shares $127,460 $ 24,778
======== =======
NET ASSETS CONSIST OF:
Paid-in-capital $137,610 $ 24,705
Undistributed net investment income 48 7
Accumulated net realized loss on
investments sold (10,843) (349)
Net unrealized appreciation on
investments 645 415
-------- -------
$127,460 $ 24,778
======== =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 13,086 2,542
Net asset value, offering and redemption
price per share $9.74 $9.75
</TABLE>
See accompanying Notes to Financial Statements.
23
<PAGE> 30
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1997
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
--------------- -----------
<S> <C> <C>
Interest income $8,499 $1,520
------ ------
Expenses:
Investment advisory and administration fee 529 89
Transfer agency and shareholder service
fees 327 55
Custodian fees 76 16
Registration fees 35 31
Professional fees 23 25
Shareholder reports 51 10
Trustees' fees 8 6
Amortization of deferred organization
costs 2 12
Insurance and other expenses 16 14
------ ------
1,067 258
Less expenses reduced and absorbed
(see Note 4) (431) (214)
------ ------
Total expenses incurred by Fund 636 44
------ ------
Net investment income 7,863 1,476
------ ------
Net realized loss on investments sold (105) (51)
Increase in net unrealized appreciation on
investments 1,132 869
------ ------
Net gain on investments 1,027 818
------ ------
Increase in net assets resulting from
operations $8,890 $2,294
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
24
<PAGE> 31
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Bond Fund Government Bond Fund
------------------------ ------------------------
Year ended Year ended Year ended Year ended
August 31, August 31, August 31, August 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 7,863 $ 8,917 $ 1,476 $ 1,100
Net realized gain (loss) on investments
sold (105) 7 (51) (30)
Increase (decrease) in net unrealized
appreciation on investments 1,132 (2,489) 869 (887)
-------- -------- -------- --------
Increase in net assets resulting from
operations 8,890 6,435 2,294 183
-------- -------- -------- --------
Dividends to shareholders from net
investment income (7,869) (8,934) (1,475) (1,098)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 28,648 25,765 16,059 21,398
Net asset value of shares issued in
reinvestment of dividends 6,022 6,945 970 741
Less payments for shares redeemed (42,250) (53,383) (15,831) (11,412)
-------- -------- -------- --------
Increase (decrease) in net assets from
capital share transactions (7,580) (20,673) 1,198 10,727
-------- -------- -------- --------
Total increase (decrease) in net assets (6,559) (23,172) 2,017 9,812
Net Assets:
Beginning of period 134,019 157,191 22,761 12,949
-------- -------- -------- --------
End of period (including undistributed net
investment income of $48, $54, $7 and $6,
respectively) $127,460 $134,019 $ 24,778 $ 22,761
======== ======== ======== ========
Number of Fund shares:
Sold 2,944 2,618 1,658 2,191
Reinvested 620 707 100 77
Redeemed (4,343) (5,428) (1,642) (1,163)
-------- -------- -------- --------
Net increase (decrease) in shares
outstanding (779) (2,103) 116 1,105
Shares Outstanding:
Beginning of period 13,865 15,968 2,426 1,321
-------- -------- -------- --------
End of period 13,086 13,865 2,542 2,426
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
25
<PAGE> 32
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate Government Bond Fund
------------------------------------------------------------------------
Eight
months Year
Year ended August 31, ended ended
-------------------------------------------- August 31, December 31,
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $ 9.67 $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28
Income from investment
operations
- -----------------------
Net investment income 0.59 0.59 0.59 0.54 0.37 0.60
Net realized and unrealized
gain (loss) on investments 0.07 (0.17) 0.03 (0.71) 0.38 0.01
--------- --------- --------- --------- --------- ---------
Total from investment
operations 0.66 0.42 0.62 (0.17) 0.75 0.61
Less distributions
- -----------
Dividends from net investment
income (0.59) (0.59) (0.59) (0.54) (0.37) (0.60)
Distributions from realized
gain on investments -- -- -- (0.12) -- (0.03)
--------- --------- --------- --------- --------- ---------
Total distributions (0.59) (0.59) (0.59) (0.66) (0.37) (0.63)
--------- --------- --------- --------- --------- ---------
Net asset value at end of
period $ 9.74 $ 9.67 $ 9.84 $ 9.81 $ 10.64 $ 10.26
========= ========= ========= ========= ========= =========
Total return (not annualized) 6.96% 4.39% 6.61% (1.67)% 7.39% 6.08%
- -------
Ratios/Supplemental data
- ----------------
Net assets, end of period
(000s) $127,460 $134,019 $157,191 $190,479 $273,973 $226,223
Ratio of expenses to average
net assets+ 0.49% 0.49% 0.58% 0.60% 0.60%* 0.43%
Ratio of net investment income
to average net assets+ 6.02% 6.03% 6.11% 5.28% 5.28%* 5.78%
Portfolio turnover rate 71% 80% 203% 91% 107% 185%
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average
net assets 0.82% 0.80% 0.81% 0.81% 0.84%* 0.89%
Ratio of net investment
income to average
net assets 5.69% 5.72% 5.88% 5.07% 5.04%* 5.32%
</TABLE>
* Annualized
See accompanying Notes to Financial Statements.
26
<PAGE> 33
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Schwab Long-Term Government Bond Fund
------------------------------------------------------
Period
ended
Year ended August 31, August 31,
1997 1996 1995 1994 1993**
------- ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.38 $ 9.80 $ 9.33 $10.53 $10.00
Income from investment operations
- -----------------------
Net investment income 0.65 0.65 0.69 0.60 0.31
Net realized and unrealized gain (loss) on
investments 0.37 (0.42) 0.47 (1.20) 0.53
-------- -------- -------- ------- -------
Total from investment operations 1.02 0.23 1.16 (0.60) 0.84
Less distributions
- -----------
Dividends from net investment income (0.65) (0.65) (0.69) (0.60) (0.31)
Distributions from realized gain on investments -- -- -- -- --
-------- -------- -------- ------- -------
Total distributions (0.65) (0.65) (0.69) (0.60) (0.31)
-------- -------- -------- ------- -------
Net asset value at end of period $ 9.75 $ 9.38 $ 9.80 $ 9.33 $10.53
======== ======== ======== ======= =======
Total return (not annualized) 11.18% 2.29% 13.03% (5.80)% 8.63%
- -------
Ratios/Supplemental data
- ----------------
Net assets, end of period (000s) $24,778 $22,761 $12,949 $7,108 $2,806
Ratio of expenses to average net assets+ 0.20% 0.00% 0.00% 0.10% 0.26%*
Ratio of net investment income to average net
assets+ 6.74% 6.67% 7.38% 6.27% 6.36%*
Portfolio turnover rate 51% 66% 240% 123% 42%
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average
net assets 1.18% 1.17% 1.18% 2.19% 19.19%*
Ratio of net investment income to
average net assets 5.76% 5.50% 6.20% 4.18% (12.57)%*
</TABLE>
* Annualized
** For the period March 5, 1993 (commencement of operations) to August 31, 1993.
See accompanying Notes to Financial Statements.
27
<PAGE> 34
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1997
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.
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.
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Realized
gains and losses from security transactions are determined on an identified cost
basis. Interest income is accrued on a daily basis and includes amortization of
premium and accretion of discount on investments. 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 by the issuer, any remaining premium is amortized through the final
maturity date.
28
<PAGE> 35
- ------------------------------------------------------------------------------
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 and their initial registration with the Securities and
Exchange Commission 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 generally 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.
At August 31, 1997, (for financial reporting and federal income tax purposes),
net unrealized appreciation for the Schwab Short/Intermediate Government Bond
Fund aggregated $645,000 of which $733,000 related to appreciated securities and
$88,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Government Bond Fund aggregated $415,000, of which $557,000
related to appreciated securities and $142,000 related to depreciated
securities.
At August 31, 1997, the Schwab Short/Intermediate Government Bond Fund had
unused capital loss carryforwards, for federal income tax purposes, of
$8,355,000, $2,216,000 and $183,000, expiring August 31, 2003, August 31, 2004
and August 31, 2005, respectively. The Schwab Long-Term Government Bond Fund had
unused capital loss carryforwards of $237,000 and $94,000 expiring August 31,
2003 and August 31, 2005, respectively.
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
29
<PAGE> 36
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
monthly, of 0.41% of each Fund's average daily net assets. The Investment
Manager has reduced a portion of its fee for the year ended August 31, 1997 (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.
Schwab has reduced a portion of its fees for the year ended August 31, 1997 (see
Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1997, 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 $14,000
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 each Fund's ratio of operating expenses to
average net assets for each Fund. During the year ended August 31, 1997, the
total of such fees reduced and absorbed by the Investment Manager and Schwab
were $234,000 and $197,000 for the Schwab Short/Intermediate Government Bond
Fund, respectively, and $160,000 and $54,000 for the Schwab Long-Term Government
Bond Fund, respectively (see Financial Highlights).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1997, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Bond Fund Government Bond Fund
-------------------- --------------------
<S> <C> <C>
Purchases $100,363 $12,911
Proceeds of sales and
maturities $107,977 $10,792
</TABLE>
30
<PAGE> 37
- ------------------------------------------------------------------------------
To the Trustees
and Shareholders of the Schwab Short/Intermediate Government Bond Fund
and the Schwab Long-Term Government Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets 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, 1997, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended 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, 1997 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 30, 1997
31
<PAGE> 38
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PROXY VOTING RESULTS
A special meeting of the shareholders of Schwab Short/Intermediate Government
Bond Fund was held on September 22, 1997. The results of votes taken among
shareholders on proposals before them are listed below:
PROPOSAL 1
Election of Trustees.
<TABLE>
<CAPTION>
Number of Number of
Shares Voted For Shares Withheld
---------------- ---------------
<S> <C> <C>
Charles R. Schwab 7,449,331.00 168,434.00
Donald F. Dorward 7,498,585.00 169,180.00
Robert G. Holmes 7,500,116.00 167,649.00
William J. Klipp 7,495,680.00 172,085.00
Timothy F. McCarthy 7,501,454.00 166,311.00
Donald R. Stephens 7,488,134.00 179,631.00
Michael W. Wilsey 7,498,700.00 169,065.00
</TABLE>
PROPOSAL 2
To approve amending the Fund's investment objective to seek to track the
investment results of the bond index.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 7,031,786.00 91.71%
Against 355,011.00 4.63%
Abstain 280,968.00 3.66%
----------------- ---------------
TOTAL 7,667,765.00 100.00%
================= ===============
</TABLE>
PROPOSAL 3.1
To approve changes to restrictions regarding borrowing and lending.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 6,777,034.00 88.38%
Against 439,507.00 5.73%
Abstain 451,223.00 5.89%
----------------- ---------------
TOTAL 7,667,764.00 100.00%
================= ===============
</TABLE>
32
<PAGE> 39
- ------------------------------------------------------------------------------
PROPOSAL 3.2
To approve change in restriction regarding underwriting of securities.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 6,784,302.00 88.48%
Against 446,855.00 5.83%
Abstain 436,607.00 5.69%
----------------- ---------------
TOTAL 7,667,764.00 100.00%
================= ===============
</TABLE>
PROPOSAL 3.3
To approve change in restriction regarding concentration of a Fund's
investments.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 6,764,057.00 88.22%
Against 457,249.00 5.96%
Abstain 446,458.00 5.82%
----------------- ---------------
TOTAL 7,667,764.00 100.00%
================= ===============
</TABLE>
PROPOSAL 3.4
To approve change in restriction regarding investment in "illiquid securities."
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 6,731,379.00 87.79%
Against 486,722.00 6.35%
Abstain 449,664.00 5.86%
----------------- ---------------
TOTAL 7,667,765.00 100.00%
================= ===============
</TABLE>
PROPOSAL 3.5
To approve change in restriction regarding purchasing securities in which
certain affiliated persons also invest.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 6,722,855.00 87.68%
Against 499,132.00 6.51%
Abstain 445,777.00 5.81%
----------------- ---------------
TOTAL 7,667,764.00 100.00%
================= ===============
</TABLE>
33
<PAGE> 40
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PROXY VOTING RESULTS (CONTINUED)
PROPOSAL 3.6
To approve change in restriction regarding investment in commodities and real
estate.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 6,682,534.00 87.15%
Against 542,152.00 7.07%
Abstain 443,078.00 5.78%
----------------- ---------------
TOTAL 7,667,764.00 100.00%
================= ===============
</TABLE>
34
<PAGE> 41
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PROXY VOTING RESULTS
A special meeting of the shareholders of Schwab Long-Term Government Bond Fund
was held on September 22, 1997. The results of votes taken among shareholders on
proposals before them are listed below:
PROPOSAL 1
Election of Trustees.
<TABLE>
<CAPTION>
Number of Number of
Shares Voted For Shares Withheld
---------------- ---------------
<S> <C> <C>
Charles R. Schwab 1,232,660.00 37,431.00
Donald F. Dorward 1,234,866.00 35,225.00
Robert G. Holmes 1,234,978.00 35,113.00
William J. Klipp 1,236,485.00 33,606.00
Timothy F. McCarthy 1,236,485.00 33,606.00
Donald R. Stephens 1,236,597.00 33,494.00
Michael W. Wilsey 1,236,597.00 33,494.00
</TABLE>
PROPOSAL 2
To approve amending the Fund's investment objective to seek to track the
investment results of the bond index.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 1,131,277.00 89.07%
Against 91,199.00 7.18%
Abstain 47,614.00 3.75%
----------------- ---------------
TOTAL 1,270,090.00 100.00%
================= ===============
</TABLE>
PROPOSAL 3.1
To approve changes to restrictions regarding borrowing and lending.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 1,081,446.00 85.15%
Against 107,432.00 8.46%
Abstain 81,212.00 6.39%
----------------- ---------------
TOTAL 1,270,090.00 100.00%
================= ===============
</TABLE>
35
<PAGE> 42
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PROXY VOTING RESULTS (CONTINUED)
PROPOSAL 3.2
To approve change in restriction regarding underwriting of securities.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 1,082,652.00 85.24%
Against 105,707.00 8.32%
Abstain 81,731.00 6.44%
----------------- ---------------
TOTAL 1,270,090.00 100.00%
================= ===============
</TABLE>
PROPOSAL 3.3
To approve change in restriction regarding concentration of a Fund's
investments.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 1,079,847.00 85.02%
Against 108,851.00 8.57%
Abstain 81,392.00 6.41%
----------------- ---------------
TOTAL 1,270,090.00 100.00%
================= ===============
</TABLE>
PROPOSAL 3.4
To approve change in restriction regarding investment in "illiquid securities."
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 1,078,350.00 84.91%
Against 110,528.00 8.70%
Abstain 81,212.00 6.39%
----------------- ---------------
TOTAL 1,270,090.00 100.00%
================= ===============
</TABLE>
PROPOSAL 3.5
To approve change in restriction regarding purchasing securities in which
certain affiliated persons also invest.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 1,075,210.00 84.66%
Against 113,295.00 8.92%
Abstain 81,585.00 6.42%
----------------- ---------------
TOTAL 1,270,090.00 100.00%
================= ===============
</TABLE>
36
<PAGE> 43
- ------------------------------------------------------------------------------
PROPOSAL 3.6
To approve change in restriction regarding investment in commodities and real
estate.
<TABLE>
<CAPTION>
# of Shares Voted % of Shares Voted
--------------------- ---------------------
<S> <C> <C>
For 1,072,155.00 84.42%
Against 116,723.00 9.19%
Abstain 81,212.00 6.39%
----------------- ---------------
TOTAL 1,270,090.00 100.00%
================= ===============
</TABLE>
37
<PAGE> 44
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 45
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 46
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 47
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money 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 OneSource Portfolios - Growth Allocation
Schwab OneSource Portfolios - Balanced Allocation
SCHWAB STOCK FUNDS
Schwab 1000 Fund(R)
Schwab S&P 500 Fund
Schwab Analytics Fund(R)
Schwab Small-Cap Index Fund(R)
Schwab OneSource Portfolios - Small Company
Schwab International Index Fund(R)
Schwab OneSource Portfolios - International
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* that seek high current income with
safety and liquidity. Choose from taxable or tax-advantaged 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(R).
Please call 1-800-435-4000 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 must be preceded or accompanied by a current prospectus.
*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> 48
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SCHWABFUNDS BULK RATE
FAMILY U.S. POSTAGE
101 Montgomery Street PAID
San Francisco, California 94104 CHARLES SCHWAB
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INVESTMENT ADVISOR
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)1997 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
TF5005R(10/97) CRS 20155 Printed on recycled paper.
