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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB INVESTMENTS
101 Montgomery Street, San Francisco, CA 94104
DECEMBER 31, 1996
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectuses, which may be amended from time to
time, dated December 31, 1996, for the Schwab 1000 Fund(R), the Schwab Long-Term
Government Bond Fund, the Schwab Short/Intermediate Government Bond Fund, the
Schwab Long-Term Tax- Free Bond Fund, the Schwab Short/Intermediate Tax-Free
Bond Fund, the Schwab California Long-Term Tax- Free Bond Fund, and the Schwab
California Short/Intermediate Tax-Free Bond Fund (each a "Fund" and,
collectively, the "Funds"), seven separately managed investment portfolios of
Schwab Investments (the "Trust"). To obtain a copy of any of these Prospectuses,
please contact Charles Schwab & Co., Inc. ("Schwab") at 800-2 NO-LOAD, 24 hours
a day or 101 Montgomery Street, San Francisco, California 94104. TDD users may
contact Schwab at 800-345-2550, 24 hours a day. These Prospectuses are also
available electronically by using our World Wide Web address:
http://www.schwab.com.
SCHWABFunds(R)
800-2 NO-LOAD
TABLE OF CONTENTS
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INVESTMENT SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 17
MANAGEMENT OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . 20
PORTFOLIO TRANSACTIONS AND TURNOVER. . . . . . . . . . . . . . . . . . . . 28
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SHARE PRICE CALCULATION. . . . . . . . . . . . . . . . . . . . . . . . . . 36
TOTAL RETURN AND YIELD. . . . . . . . . . . . . . . . . . . . . . . . . . 37
SCHWABFUNDS INVESTMENT STRATEGIES. . . . . . . . . . . . . . . . . . . . . 40
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . 48
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
APPENDIX - RATINGS OF INVESTMENT SECURITIES. . . . . . . . . . . . . . . . 50
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
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INVESTMENT SECURITIES
U.S. GOVERNMENT SECURITIES
Direct obligations of the U.S. Government are supported by the full
faith and credit of the U.S. Treasury. While obligations of certain U.S.
Government agencies and instrumentalities are similarly backed, those of others,
such as the Federal National Mortgage Association and the Student Loan Marketing
Association, are only supported by the right of the issuer to borrow from the
U.S. Treasury, the discretionary authority of the U.S. Government to purchase
the agency's obligations or the credit of the issuing agency or instrumentality.
There can be no assurance that the U.S. Government would provide financial
support to U.S. Government sponsored agencies or instrumentalities if it were
not obligated to do so by law. A Fund will invest in U.S. Government securities
not backed by the full faith and credit of the U.S. Treasury only when Charles
Schwab Investment Management, Inc. (the "Investment Manager") is satisfied that
the credit risk with respect to their issuer is minimal.
GOVERNMENT
"MORTGAGE BACKED" SECURITIES
Government "mortgage-backed" (or government guaranteed
mortgage-related) securities are among the U.S. Government securities in which
the Funds may invest. Mortgages backing the securities purchased by the Funds
include, among others, conventional 30-year fixed rate , graduated payment
mortgages, 15-year mortgages and adjustable rate mortgages. All of these
mortgages can be used to create pass-through securities. A pass-through security
is formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity indicates. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities. Accelerated prepayments adversely impact yields for
pass-throughs purchased at a premium (i.e., a price in excess of principal
amount) and may involve additional risk of loss of principal because the premium
may not be fully amortized at the time the obligation is repaid. The opposite is
true for pass-throughs purchased at a discount. The Funds may
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purchase mortgage-related securities at a premium or at a discount. Principal
and interest payments on the mortgage-related securities are guaranteed by the
government to the extent described below. Such guarantees do not extend to the
value or yield of the mortgage-related securities themselves or of a Fund's
shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. The GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"): mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble
GNMA Certificates in that each PC represents a pro rata share of all interest
and principal payments made and owed on the underlying pool. The FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately 10 years. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. Government.
FNMA Securities. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a
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secondary market in mortgages the FHA insures. FNMA issues guaranteed mortgage
pass-through certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA
Certificates in that each FNMA Certificate represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. FNMA
guarantees timely payment of interest and principal on FNMA Certificates. The
FNMA guarantee is not backed by the full faith and credit of the U.S.
Government.
OTHER ASSET-BACKED SECURITIES
Each Fund may invest a portion of its assets in debt obligations known
as "Asset-Backed Securities" that are rated in one of the four highest rating
categories by a nationally recognized statistical rating organization (e.g.,
Standard & Poor's Corporation or Moody's Investors Service, Inc.) or, if not so
rated, deemed to be of equivalent quality by the Investment Manager pursuant to
guidelines adopted by the Board of Trustees. The credit quality of most
Asset-Backed Securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator (or any other affiliated
entities) and the amount and quality of any credit support provided to the
securities. The rate of principal payments on Asset- Backed Securities generally
depends on the rate of principal payments received on the underlying assets,
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any Asset-Backed Security is difficult to predict with
precision, and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset- Backed Securities may be classified as "Pass-Through
Certificates" or "Collateralized Obligations."
"Pass-Through Certificates" are Asset-Backed Securities that represent
undivided fractional ownership interests in the underlying pool of assets. Pass-
Through Certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because Pass-
Through Certificates represent ownership interests in the underlying assets, the
holders thereof bear directly the risk of any defaults by the obligors on the
underlying assets not covered by any credit support.
Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such Asset-Backed Securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
Asset-Backed Securities and any credit support provided. As a result, although
payments on such Asset-Backed Securities are obligations of the issuers, in the
event of default on the underlying assets not covered by any credit support, the
issuing entities are unlikely to have sufficient assets to satisfy
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their obligations on the related Asset-Backed Securities.
METHODS OF ALLOCATING
CASH FLOWS
While many Asset-Backed Securities are issued with only one class of
security, many others are issued in more than one class, each with different
payment terms. Multiple class Asset- Backed Securities are issued for two main
reasons. First, multiple classes may be used as a method of providing credit
support. This is typically accomplished by creating one or more classes with a
right to payments on the Asset-Backed Security that is subordinate to that of
the remaining class or classes. Second, multiple classes may permit the issuance
of securities with payment terms, interest rates or other characteristics that
differ both from those of each other and from those of the underlying assets.
Examples include so-called "multi-tranche CMOs" (collateralized mortgage
obligations) with serial maturities such that all principal payments received on
the mortgages underlying the securities are first paid to the class with the
earliest stated maturity, and then sequentially to the class with the next
stated maturity, "Strips" (Asset- Backed Securities that entitle the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security) and securities with a class or
classes having characteristics that mimic the characteristics of
non-Asset-Backed Securities, such as floating interest rates (i.e., interest
rates that adjust as a specified benchmark changes) or scheduled amortization of
principal.
TYPES OF CREDIT SUPPORT
Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two classes: liquidity protection and protection against ultimate default
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made timely. Protection
against ultimate default ensures payment on at least a portion of the assets in
the pool. Such protection may be provided through guarantees, insurance policies
or letters of credit obtained from third parties, through various means of
structuring the transaction, or through a combination of such approaches.
Examples of Asset- Backed Securities with credit support that arises out of the
structure of the transaction include "senior-subordinated securities" (multiple
class Asset-Backed Securities with certain classes subordinate to other classes
as to the payment of principal thereon, so that defaults on the underlying
assets are borne first by the holders of the subordinated class) and
Asset-Backed Securities that have "reserve funds" (cash or investments,
sometimes funded from a portion of the initial payments on the underlying
assets, are held in reserve against future losses) or that have been
"overcollateralized" (the scheduled
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payments on, or the principal amount of, the underlying assets substantially
exceed that required to make payment on the Asset-Backed Securities and pay any
servicing or other fees). The degree of credit support provided on each issue is
generally based on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an Asset-Backed Security.
CREDIT CARD RECEIVABLE SECURITIES
Each Fund may invest in Asset- Backed Securities backed by receivables
from revolving credit card agreements ("Credit Card Receivable Securities").
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying accounts are passed through to
the security holder and principal payments received on such accounts are used to
fund the transfer of additional credit card charges made on an account to the
pool of assets supporting the related Credit Card Receivable Securities. The
initial fixed period may usually be shortened upon the occurrence of specified
events that signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. Competitive and general economic factors
could adversely affect the rate at which new receivables are created in an
account and conveyed to an issuer, shortening the expected weighted average
life of the related Credit Card Receivable Security, and reducing its yield. An
acceleration in cardholders' payment rates or any other event that shortens the
period during which additional credit card charges on an account may be
transferred to the pool of assets supporting the related Credit Card Receivable
Security could have a similar effect on the weighted average life and yield.
Credit card holders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holders the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on accounts. In addition, unlike most other Asset-Backed
Securities, accounts are unsecured obligations of the cardholder.
MUNICIPAL SECURITIES
"Municipal Securities" are debt securities issued by a state, its
political subdivisions, agencies, authorities, and corporations. Municipal
Securities issued by or on behalf of the State of California, its subdivisions,
agencies or authorities are referred to herein as "California Municipal
Securities."
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Municipal Securities that the Schwab Long-Term Tax-Free Bond Fund and
the Schwab Short/Intermediate Tax- Free Bond Fund (the "Municipal Bond Funds")
may purchase, and California Municipal Securities that the Schwab California
Long-Term Tax-Free Bond Fund and the Schwab California Short/Intermediate
Tax-Free Bond Fund (the "California Municipal Bond Funds") may purchase include,
without limitation, debt obligations issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as airports, bridges, highways, housing, hospitals, mass transportation, public
utilities, schools, streets, and water and sewer works. Other public purposes
for which Municipal Securities may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and obtaining funds
to loan to other public institutions and facilities.
Municipal Securities include securities issued to finance various
private activities, including certain types of private activity bonds
("industrial development bonds" under prior law). These securities may be issued
by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. The Municipal Bond Funds and the
California Municipal Bond Funds may not be desirable investments for
"substantial users" of facilities financed by private activity bonds or
industrial development bonds or for "related persons" of substantial users for
whom dividends attributable to interest on such bonds may not be tax-exempt.
Shareholders should consult their own tax advisers regarding the potential
effect on them (if any) of any investment in these Funds.
Municipal Securities are generally classified as "general obligation"
or "revenue." General obligation notes are secured by the issuer's pledge of its
full credit and taxing power for the payment of principal and interest. Revenue
notes are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Private activity bonds and industrial development
bonds that are Municipal Securities are in most cases revenue bonds and
generally do not constitute the pledge of the credit of the issuer of such
bonds.
Examples of Municipal Securities that are issued with original
maturities of one year or less are short-term tax anticipation notes, bond
anticipation notes, revenue anticipation notes, construction loan notes,
pre-refunded municipal bonds and tax-free commercial paper. Tax anticipation
notes are typically sold to finance working capital needs of municipalities in
anticipation of the receipt of property taxes on a future date. Bond
anticipation notes are sold on an interim basis in anticipation of a
municipality's issuance of a longer-term bond in the future. Revenue
anticipation notes are issued in expectation of the receipt of other types of
revenue such as those available under the Federal Revenue Sharing Program.
Construction loan notes are instruments insured by the Federal Housing
Administration with permanent financing by "Fannie Mae"
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(the Federal National Mortgage Association) or "Ginnie Mae" (the Government
National Mortgage Association) at the end of the project construction period.
Pre-refunded municipal bonds are bonds that are not yet refundable, but for
which securities have been placed in escrow to refund an original municipal bond
issue when it becomes refundable. Tax-free commercial paper is an unsecured
promissory obligation issued or guaranteed by a municipal issuer. The Municipal
Bond Funds and the California Municipal Bond Funds may purchase other Municipal
Securities similar to the foregoing, which are or may become available,
including securities issued to pre-refund other outstanding obligations of
municipal issuers.
The federal bankruptcy statutes relating to the adjustments of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or the
consent of creditors, which proceedings could result in material adverse changes
in the rights of holders of obligations issued by such subdivisions or
authorities.
Litigation challenging the validity under the state constitutions of
present systems of financing public education has been initiated or adjudicated
in a number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law, which ultimately could
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
RISK FACTORS:
CALIFORNIA MUNICIPAL SECURITIES
In addition to general economic pressures which affect the State of
California's (the "State") ability to raise revenues to meet its financial
obligations, certain State constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could also
result in the adverse effects described below. The following information is only
a brief summary, is not a complete description and is based on information drawn
from official statements and prospectuses relating to securities offerings of
the State that have come to the attention of the Trust and were available before
the date of this Statement of Additional Information. The Trust has not
independently verified the accuracy and completeness of the information
contained in those statements and prospectuses.
As used in this section, "California Municipal Securities" includes
issues that are secured by a direct payment obligation of the State and
obligations of issuers that rely in whole or in part on State revenues for
payment of their obligations. Property tax revenues and part of the State's
General Fund surplus are distributed to counties, cities and their various
taxing entities; whether and to what extent a portion of the State's
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General Fund will be distributed in the future to them is unclear.
Overview. After suffering through a severe recession, since the start
of 1994 California's economy has been on a steady recovery. Employment increased
by over 500,000 in 1994 and 1995, and the pre- recession employment level is
expected to be matched in 1996. The strongest growth has been in export-related
industries, business services, electronics, entertainment, and tourism, which
has offset the recession-related losses which were heaviest in aerospace and
defense- related industries, finance and insurance.
The recession seriously affected State tax revenues and caused an
increase in expenditures for health and welfare programs. As a result, from the
late 1980s through 1992-1993, the State experienced recurring budget deficits.
During this period, expenditures exceeded revenues in four out of six years, and
the State accumulated a budget deficit of about $2.8 billion at its peak at June
30, 1993. One consequence of the large budget imbalances was to significantly
reduce the State's available cash resources and force the State to use a series
of external borrowings to meet its cash needs.
As a result of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since October 1992, all
three major nationally recognized statistical rating organizations lowered the
State's general obligation bond rating from the highest ranking of "AAA." The
State's general obligation bonds are now rated "A+" by Standard and Poor's
Corporation ("S&P"), "A1" by Moody's Investors Service, Inc. ("Moody's") and
"A+" by Fitch Investors Service, Inc. ("Fitch").
State Appropriations Limit. Subject to certain exceptions, the State is
subject to an annual appropriations limit imposed by its Constitution on
"proceeds of taxes." Various expenditures, including but not limited to debt
service on certain bonds and appropriations for qualified capital outlay
projects, are not included in the appropriations limit.
1994-1995 FISCAL YEAR
Revenues. The 1994-1995 Budget Act projected General Fund revenues and
transfers of $41.9 billion, or about $2.1 billion more than 1993-1994, as
revised. This projection included the receipt of approximately $760 million in
new federal aid to reimburse the State for certain costs related to refugees and
undocumented foreign immigrants. Only about $33 million of this amount was
received, with another $98 million scheduled to be received in the 1995-1996
fiscal year. The 1994-1995 Budget Act also projected Special Fund revenues of
$12.1 billion, a decrease of 2.4% from 1993-1994.
Expenditures. The 1994-1995 Budget Act projected General Fund
expenditures of $40.9 billion (a $1.6 billion increase from projected 1993-1994
expenditures), in order to keep a balanced budget which pays off the accumulated
deficit, within available revenues. The 1994-1995 Budget Act also projected
Special Fund expenditures of $12.3
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billion, a 4.7% decrease from 1993-1994. The 1994-1995 Budget Act balanced the
budget with a number of major adjustments, including the receipt of about $1.1
billion from the federal government for health and welfare costs and an increase
of about $526 million in Proposition 98 General Fund support for K-14 schools.
Cash resources at the beginning of the 1994-1995 fiscal year were
insufficient to meet all obligations without external borrowing, such as
occurred in 1992. The 1994-1995 Budget Act assumed that the State would use a
cash flow borrowing program in 1994-1995 which combined one-year notes and
two-year warrants, which have now been issued. Issuance of the warrants allows
the State to defer repayment of about $1 billion of its accumulated budget
deficit into 1995-1996. Additional legislation was passed with the 1994-1995
Budget Act designed to ensure that the warrants will be repaid in the 1995-1996
fiscal year.
As a result of the improving economy, the State Department of Finance's
final estimates for the fiscal year showed revenues and transfers of $42.7
billion and expenditures of $42 billion.
1995-1996 FISCAL YEAR
Notwithstanding the improved economy, because of serious policy
differences, the 1995-1996 Budget Act was not enacted until August 3, 1995, 34
days after the start of the fiscal year.
Revenues. The 1995-1996 Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5% increase from 1994-1995. The 1995-1996 Budget
Act projected that the General Fund will end the 1995-1996 fiscal year with a
slight surplus of $28 million at June 30, 1996, and that all of the accumulated
budget deficits will have been repaid. In May 1996, the State Department of
Finance updated the 1995-1996 projections, and estimated that there would be
revenues and transfers of about $46.1 billion but, due to increased
expenditures, there would instead be a deficit of about $70 million in the
budget reserve at June 30, 1996. Principal features of the 1995-1996 Budget Act
included an increase in Proposition 98 funding for K-14 schools of about $1.2
billion, reductions in health and welfare costs of about $900 million (about
$500 million of which depends upon federal legislative approval), and receipt of
an additional $494 million in federal aid for costs of illegal immigrants (above
commitments already made by the federal government; only $31 million of this was
received in 1995-1996). Special Fund revenues were estimated at $12.7 billion.
Expenditures. The 1995-1996 Budget Act projected General Fund
expenditures of $43.4 billion, a 4% increase from 1994-1995. Special Fund
expenditures of $13 billion have been appropriated. The May 1996 State
Department of Finance revisions projected that expenditures for 1995-1996 would
increase to about $45.4 billion.
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1996-97 FISCAL YEAR
The Governor's proposed budget for 1996-1997 projected General Fund
revenues and transfers of about $45.6 billion and proposed total General Fund
appropriations of about $45.2 billion. The Governor's proposed budget renewed a
proposal, which had been rejected by the Legislature in 1995, for a 15% cut in
personal and corporate tax rates, phased in over a three-year period. In May
1996, the State Department of Finance updated revenue estimates to $47.1 billion
for 1996- 1997, assuming enactment of the Governor's proposed tax cut, and
expenditure estimates to $46.5 billion.
Revenues. The 1996-1997 Budget Act, enacted on July 15, 1996, rejected
the Governor's proposed 15% tax cut (but did include a 5% cut in bank and
corporation taxes). Consequently, revenues for 1996- 1997 were increased to an
estimated $47.6 billion. Special fund revenues are estimated to be $13.3
billion. The 1996- 1997 Budget Act appropriated a budget reserve of $305 million
at June 30, 1997. This budget reserve assumed savings of about $660 million in
the State's health and welfare costs based on changes to federal law, including
welfare reform. The federal welfare reform legislation passed in August 1996 is
projected to provide only about $360 million of the assumed $660 million in
savings, however, subject to further adjustment based on how the State
implements changes to its welfare system. Other principal features of the
1996-1997 Budget Act include an increase in Proposition 98 funding for K-14
schools of about $1.6 billion, and about $700 million in new federal aid for
costs of illegal immigrants (with about $540 million to be received during
1996-1997).
Expenditures. The 1996-1997 Budget Act includes General Fund
appropriations of about $47.2 billion, a 4% increase over the final estimated
1995- 1996 expenditures. Special Fund expenditures are budgeted at $12.6
billion.
The foregoing discussions of the 1994-1995, 1995-1996 and 1996-1997
Budgets are based upon the Budget Acts for these years, and should not be
construed as a statement of fact. The assumptions used to construct a budget,
which include estimates and projections of revenues and expenditures, may be
affected by numerous factors, including future economic conditions in the State
and the Nation. There can be no assurances that any estimates will be achieved.
ISSUES AFFECTING LOCAL
GOVERNMENTS AND SPECIAL DISTRICTS
Proposition 13. Certain California Municipal Securities may be
obligations of issuers that rely in whole or in part on ad valorem real property
taxes as a source of revenue. In 1978, California voters approved Proposition
13, which limits ad valorem taxes on real property and restricts the ability of
taxing entities to increase property tax and other tax revenues.
With certain exceptions, the maximum ad valorem tax on real property is
limited to 1% of the full cash value to be
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collected by the counties and apportioned according to law. One exception is for
debt service on bonded indebtedness if such is approved by two-thirds of the
votes cast by voters voting on the proposition. The full cash value may be
adjusted annually to reflect inflation at a rate not to exceed 2% per year, or
reduction in the consumer price index or comparable local data, or reduced in
the event of declining property value caused by substantial damage, destruction
or other factors, or adjusted when there is a "change in ownership" or "new
construction."
Proposition 62. This initiative, approved by voters in 1986, placed
further restrictions on the ability of local governments to raise taxes and
allocate approved tax revenues. Although some of the California Courts of Appeal
held that parts of Proposition 62 were unconstitutional, the California Supreme
Court recently issued a decision that upheld Proposition 62's requirement that
special taxes be approved by a two-thirds vote of the voters voting in an
election on the issue. This recent decision may invalidate other taxes that have
been imposed by local governments in California and make it more difficult for
local governments to raise taxes.
Propositions 98 and 111. These initiatives changed the State
appropriations limit and State funding of public education below the university
level by guaranteeing K-14 schools a minimum share of General Fund revenues. The
initiatives require that the State establish a prudent state reserve fund for
public education.
Proposition 218. Passed in November 1996, this initiative places
additional limitations on the ability of California local governments to
increase or impose general taxes, special assessments, and many fees by
requiring voter approval of such items. General taxes and many assessments and
fees that were passed without public approval after 1994 and before November 6,
1996 must now be approved by voters by either July 1, 1997 or November 6, 1998
to continue in effect.
Appropriations Limit. Local governmental entities are also subject to
annual appropriations limits. If a local government's revenues in any year
exceed the amount permitted to be spent, the excess must be returned to the
public through a revision of tax rates or fee schedules over the following two
years.
Conclusion. The effect of these constitutional and statutory changes
and of budget developments on the ability of California issuers to pay interest
and principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds are generally less affected). There is no assurance that any
California issuer will make full or timely payments of principal or interest or
remain solvent. For example, in December 1994, Orange County filed for
bankruptcy. The California Municipal Bond Funds' concentration in California
Municipal Securities provides a greater level of risk than a fund that is
diversified across numerous states and municipal entities.
12
<PAGE> 13
ADDITIONAL ISSUES
Mortgages and Deeds of Trust. The California Municipal Bond Funds may
invest in issues which are secured in whole or in part by mortgages or deeds of
trust on real property. California law limits the remedies of a creditor secured
by a mortgage or deed of trust, which may result in delays in the flow of
revenues to an issuer.
Lease Financings. Some local governments and districts finance certain
activities through lease arrangements. It is uncertain whether such lease
financings are debt that require voter approval.
Seismic Risk. It is impossible to predict the time, magnitude or
location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck Los Angeles, causing significant damage
to structures and facilities in a four county area. The possibility exists that
another such earthquake could create a major dislocation of the California
economy.
CERTIFICATES OF DEPOSIT
AND BANKERS' ACCEPTANCES
Certificates of deposit are certificates issued against funds deposited
in a banking institution for a specified period of time at a specified interest
rate. Bankers' acceptances are credit instruments evidencing a bank's obligation
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. Each Fund will invest only in certificates of deposit
and bankers' acceptances of banks that have capital, surplus and undivided
profits in excess of $100 million.
COMMERCIAL PAPER
Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs. The Funds will only invest in
commercial paper that at the time of purchase is rated Prime-1 or Prime-2 by
Moody's, A-1 or A-2 by S&P, "Duff 2" or higher by Duff & Phelps Credit Rating
Co. ("Duff"), or "F2" or higher by Fitch or if unrated by Moody's, S&P, Duff or
Fitch, is determined by the Investment Manager, using guidelines approved by the
Board of Trustees, to be at least equal in quality to one or more of the above
ratings.
REPURCHASE AGREEMENTS
Repurchase agreements are instruments under which a buyer acquires
ownership of a security from a seller that agrees to repurchase the security at
a mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the buyer's holding period. Under
the Investment Company Act of 1940, as amended (the "1940 Act"), a repurchase
agreement is deemed to be a Fund's loan of money to the seller, collateralized
by the underlying security. The interest rate is effective for the period of
time in which the Funds are invested in the agreement and is not related to the
coupon rate on the underlying security.
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<PAGE> 14
Any repurchase agreements a Fund enters into will involve the Fund as the buyer
and banks or broker-dealers as sellers (repurchase agreements with
broker-dealers will be limited to obligations of the U.S. Government or its
agencies or instrumentalities). The period of these repurchase agreements will
be usually short--from overnight to one week--and at no time will the Funds
invest in repurchase agreements for more than one year. However, securities
subject to repurchase agreements may have maturity dates in excess of one year
from the effective date of the repurchase agreements. The transaction requires
the initial collateralization of the seller's obligation with securities having
a market value, including accrued interest, equal to at least 102% of the dollar
amount the Funds invest with the value marked-to- market daily to maintain 100%
coverage. A default by the seller might cause the Funds to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Funds might also incur disposition costs in liquidating the collateral. The
Funds will make payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of its custodian bank. The Funds
may not enter into a repurchase agreement of more than seven days duration if,
as a result, the market value of the Funds' net assets, together with
investments in other securities deemed to be not readily marketable, would be
invested in excess of the Funds' policy on investments in illiquid securities.
In the event of a bankruptcy or other default of a repurchase
agreement's seller, a Fund might incur expenses in enforcing its rights, and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Each Fund will not invest more than 10% of its
net assets at the time of purchase in repurchase agreements maturing in more
than seven days and other illiquid securities.
PORTFOLIO MATURITY
From time to time, the California Municipal Bond Funds, the Municipal
Bond Funds and the Government Bond Funds may compare their average portfolio
maturities with the average portfolio maturities of other mutual funds having
similar investment objectives.
PORTFOLIO SECURITIES LENDING
Loans of portfolio securities made by any Fund will be fully
collateralized and will be marked to market daily.
FUTURES AND OPTIONS CONTRACTS,
EQUITY INDEX PARTICIPATIONS AND
INDEX PARTICIPATION CONTRACTS
The Schwab Short/Intermediate Government Bond Fund and the Schwab
Long-Term Government Fund (the "Government Bond Funds") and the Schwab 1000
Fund(R) (for purposes of this sub-section only, each a "Fund" and, together, the
"Funds") may buy and sell futures contracts on securities and any index
comprised of securities in which the Funds may invest, option contracts on
securities, indexes and futures contracts, equity index participations, and
index participation contracts.
14
<PAGE> 15
In a securities futures contract, one party agrees to make, and the
other agrees to take, delivery of a specific amount of a specific security at a
specified time and price. Under a securities index futures contract, the parties
agree to make or take delivery of an amount of cash equal to a specific dollar
amount times the difference between the value of an agreed-upon securities index
at the end of the contract period and its value at the time the agreement was
originally made. Futures contracts are commonly "closed out" prior to the end of
the contract period by entering into an offsetting transaction in a
corresponding futures contract.
Options on indexes are similar to options on securities except that,
rather than representing the right to take or make delivery of a security at a
specified exercise price, an option on a securities index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the securities index upon which the option is based is "in the money."
This amount of cash is equal to the difference between the closing level of the
index and the exercise price of the option, expressed in dollars times a
specified multiple. Unlike securities options, all settlements are in cash, and
gain or loss depends on price movements in the group of securities comprising
the index rather than price movements of individual securities.
Index participations and index participation contracts provide the
equivalent of a position in the securities comprising an index, with each
security's representation equaling its index weighting. Moreover, their holders
are entitled to payments equal to the dividends paid by the underlying index
securities. Generally, the value of an index participation or index
participation contract will rise and fall along with the value of the related
index. A Fund will invest in equity index participations and index participation
contracts only if a liquid market for them appears to exist.
When buying or selling futures contracts, a Fund must deposit an amount
of cash, cash equivalents or liquid, high quality debt instruments with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract, which will be returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," will be
made at least daily as the price of the futures contract fluctuates, and the
Fund's position in the contract becomes more or less valuable. This process is
known as "marking-to-market."
Regulations of the Commodities Futures Trading Commission ("CFTC")
applicable to the Funds generally require that all of their futures transactions
constitute "bona fide" hedging transactions. As a result, a Fund will normally
sell futures contracts to protect against a decrease in the price of securities
it owns but intends to sell or purchase futures contracts to protect against an
increase in the price of securities it intends to purchase. In
15
<PAGE> 16
addition, the Funds may purchase and sell futures contracts and options as a
substitute for a comparable market position in the underlying securities.
Futures transactions need not constitute "bona fide" hedging under CFTC
regulations if the aggregate initial margin and premiums required to establish
such positions do not exceed 5% of each Fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and options
transactions involve risks, which in some strategies can be substantial due to
the low margin deposits required and the extremely high degree of leverage
involved in futures and options trading. However, to the extent the Funds'
futures and options practices are limited to hedging purposes, the Investment
Manager does not believe that the Funds are subject to the degree of risk
frequently associated with futures and options transactions. To the extent the
Funds engage in the use of futures and options on futures other than for hedging
purposes, the Funds may be subject to additional risk.
Three principal areas of risk are present when futures and options
contracts are used even in a hedging context. First, there may not always be a
liquid secondary market for a futures or option contract at the time when a Fund
seeks to "close out" its position. If a Fund is unable to "close out" a futures
or option position, and prices move adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund has
insufficient cash to meet this requirement, it may have to sell portfolio
securities at a disadvantageous time. In addition, the Fund might be required to
deliver the securities underlying futures or options contracts it holds. Each
Fund will seek to reduce the risk that it will be unable to "close out"
contracts by entering into only futures or options contracts that are traded on
national exchanges and for which there appears to be a liquid secondary market.
It is also possible that changes in the prices of futures or options
contracts might correlate imperfectly, or not at all, with changes in the market
values of the securities being hedged. This situation could result from price
distortions in the futures or options markets due to, among other things, active
trading by speculators and use of offsetting "closing" transactions by other
investors seeking to avoid meeting additional margin deposit requirements. In
the event of significant market distortions, it is possible that a Fund could
lose money on futures or options contracts and experience appreciation in the
value of its portfolio securities, or vice versa.
Finally, adverse market movements could cause a Fund to lose up to its
full investment in an options contract and/or to experience substantial losses
on an investment in a futures contract. However, barring such significant market
distortions, a similar result could be expected were the Fund to invest directly
in the securities being hedged. There is also the risk of loss by a Fund of
margin deposits in the event of bankruptcy of a broker with whom the
16
<PAGE> 17
Fund has an open position in a futures contract or option.
The extent to which each Fund may purchase and sell futures, options,
equity index participations and index participation contracts may be limited by
each Fund's intention to meet the Internal Revenue Code of 1986, as amended (the
"Code"), requirements for qualification as a regulated investment company. See
"Taxes - Federal Income Tax."
INVESTMENT RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund to which
they apply. A Fund may not:
1) As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of such issuer, except
that, with respect to the Schwab California Long-Term Tax-Free Bond
Fund, provided that no more than 25% of the Fund's total assets would
be invested in the securities of a single issuer, up to 50% of the
Fund's total assets may be invested without regard to this 5%
limitation; and, provided further, that, with respect to the Municipal
Bond Funds and the Schwab California Short/Intermediate Tax-Free Bond
Fund and as a matter of non-fundamental policy that may be changed by
the Board of Trustees, so long as no more than 25% of the Fund's total
assets would be invested in the securities of a single issuer, up to
50% of the Fund's total assets may be invested without regard to the 5%
limitation set forth above.
2) Purchase securities (other than securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the value of its total assets would be
invested in any industry (except, with respect to the Schwab 1000
Fund(R), to the extent that the Schwab 1000 Index(R) is also so
concentrated). Securities issued by governments or political
subdivisions or authorities of governments are not considered to be
securities subject to this industry concentration restriction.
3) Invest more than 10% of the total value of its assets in illiquid
securities, including repurchase agreements with maturities in excess
of seven days.
4) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or the Investment Manager
individually own beneficially more than 1/2
17
<PAGE> 18
of 1% of the securities of such issuer and together beneficially own
more than 5% of the securities of such issuer.
5) Purchase or sell commodities or real estate, including interests in
real estate limited partnerships, provided that each Fund may (i)
purchase securities of companies that deal in real estate or interests
therein, and (ii) purchase or sell futures contracts, options
contracts, equity index participations and index participation
contracts.
6) Invest for the purpose of exercising control or management of another
issuer.
7) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
8) Lend money to any person, except that each Fund may (i) purchase a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are publicly
distributed or customarily purchased by institutional investors, and
(ii) lend its portfolio securities.
9) Borrow money except from banks as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes and then
only in an amount not to exceed one-third of the value of its total
assets (including the amount borrowed), provided that the Fund will not
purchase securities while borrowings represent more than 5% of its
total assets.
10) Pledge, mortgage or hypothecate any of its assets except that to secure
allowable borrowings, each Fund may do so with respect to no more than
one-third of the value of its total assets (10% of net assets with
respect to the Municipal Bond Funds and the California Municipal
Bond Funds).
11) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
In order to permit the sale of shares of each Fund in certain
jurisdictions, each Fund may make commitments more restrictive than the
fundamental operating restrictions described above. Should it do so and later
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders, it will revoke the commitment(s) by terminating sales
of its shares in the jurisdiction(s) involved.
The following restrictions are non-fundamental and may be changed by
the Trust's Board of Trustees. Each of the Funds may not:
18
<PAGE> 19
1) Purchase more than 10% of any class of securities of any issuer if, as
a result of such purchase, it would own more than 10% of such issuer's
outstanding voting securities.
2) Invest more than 5% of its total assets in securities of issuers (other
than obligations of, or guaranteed by the U.S. Government, its agencies
or instrumentalities) that with their predecessors have a record of
less than three years continuous operation.
3) Purchase securities that would cause more than 5% of its net assets to
be invested in restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of
1933 that have been determined to be liquid under procedures adopted by
the Trust's Board of Trustees based upon the trading markets for the
securities.
4) Invest more than 5% of its net assets in warrants, valued at the lower
of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the
American Stock Exchange, provided, however, that for purposes of this
restriction, warrants acquired by a Fund in units or attached to other
securities are deemed to be without value.
5) Purchase puts, calls, straddles, spreads or any combination thereof if
by reason of such purchase the value of its aggregate investment in
such securities would exceed 5% of the Fund's total assets.
6) Make short sales, except for short sales against the box.
7) Purchase or sell interests in oil, gas or other mineral development
programs or leases, although it may invest in companies that own or
invest in such interests or leases.
8) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
9) Purchase securities the income of which is subject to the Federal
Alternative Minimum Tax (AMT) if, by reason of such purchase, the total
income earned by such securities would exceed 20% of all income earned
by the Fund.
The Schwab Long-Term Tax-Free Bond Fund and the Schwab California
Long-Term Tax-Free Bond Fund each may be invested in long-term bonds, and in
obligations of any maturity, although their dollar weighted maturities under
normal market conditions will be 10 years or longer.
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<PAGE> 20
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The Officers and Trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Schwab and the Investment Manager, are as
follows:
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ ------------- ---------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Chairman, Chief Executive Officer and Director, The
July 29, 1937 Trustee Charles Schwab Corporation; Chairman and Director,
Charles Schwab & Co., Inc. and Charles Schwab
Investment Management, Inc.; Chairman and Director. The
Charles Schwab Trust Company; Chairman and Director
(current board positions), and Chairman (officer
position) until December 1995 Mayer & Schweitzer, Inc.
(a securities brokerage subsidiary of The Charles Schwab
Corporation); Director, The Gap, Inc. (a clothing
retailer), Transamerica Corporation (a financial
services organization), AirTouch Communications (a
telecommunications company) and Siebel Systems (a
software company).
TIMOTHY F. McCARTHY** President and Executive Vice President - Mutual Funds, Charles Schwab
September 19, 1951 Trustee & Co., Inc.; Executive Vice President - President,
Financial Products and International Group, the Charles
Schwab Corporation; Chief Executive Officer, Charles
Schwab Investment Management, Inc.; President, Chief
Financial Officer and Director, Charles Schwab Limited;
Director, Mayer & Schweitzer. From 1994 to 1995, Mr.
McCarthy was Chief Executive Officer, Jardine Fleming
Unit Trusts Ltd.;
</TABLE>
- ----------
*Mr. Schwab is an "interested person" of the Trust.
**Mr. McCarthy is an "interested person" of the Trust.
20
<PAGE> 21
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ ------------- ---------------------
<S> <C> <C>
Executive Director, Jardine Fleming Holdings Ltd.;
Chairman, Jardine Fleming Taiwan Securities Ltd.; and
Director of JF India and Fleming Flagship, Europe.
Prior to 1994, he was President of Fidelity Investments
Advisor Group, a division of Fidelity Investments in
Boston.
DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
September 23, 1931 Associates (advertising and marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director, Semloh
May 15, 1931 Financial, Inc. Semloh Financial is an international
financial services and investment advisory firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (investment
June 28, 1938 banking). Prior to 1995, Mr. Stephens was Chairman and
Chief Executive Officer of North American Trust (a real
estate investment trust). Prior to 1992, Mr. Stephens
was Chairman and Chief Executive Officer of the Bank of
San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director, Wilsey
August 18, 1943 Bennett, Inc. (truck and air transportation, real estate
investment and management, and investments).
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ ------------- ---------------------
<S> <C> <C>
TAI-CHIN TUNG Treasurer and Vice President - Finance, Charles Schwab & Co., Inc.;
March 7, 1951 Principal Controller, Charles Schwab Investment Management, Inc.
Financial Officer From 1994 to 1996, Ms. Tung was Controller for
Robertson Stephens Investment Management, Inc. From
1993 to 1994, she was Vice President of Fund Accounting,
Capital Research and Management Co. Prior to 1993, Ms.
Tung was Senior Vice President of the Sierra Funds and
Chief Operating Officer of Great Western Financial
Securities.
WILLIAM J. KLIPP* Executive Vice Executive Vice President, SchwabFunds(R), Charles Schwab
December 9, 1955 President, Chief & Co., Inc.; President and Chief Operating Officer,
Operating Officer Charles Schwab Investment Management, Inc. Prior to
and Trustee 1993, Mr. Klipp was Treasurer of Charles Schwab & Co.,
Inc. and Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief Investment Officer,
April 5, 1955 President and Chief Charles Schwab Investment Management, Inc.
Investment
Officer
FRANCES COLE Secretary Vice President, Chief Counsel, Chief Compliance Officer
September 9, 1955 and Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
- ----------
*Mr. Klipp is an "interested person" of the Trust.
22
<PAGE> 23
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ ------------- ---------------------
<S> <C> <C>
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel, Charles Schwab
October 14, 1960 Investment Management, Inc. From 1991 to 1992, he was
Assistant Secretary for the Franklin Group of Mutual
Funds and Assistant Corporate Counsel for Franklin
Resources, Inc..
CHRISTINA M. PERRINO Assistant Secretary Vice President and Senior Counsel, Charles Schwab
June 16, 1961 Investment Management, Inc. Prior to 1994, she was
Counsel and Assistant Secretary for North American
Security Life Insurance Company and Secretary for North
American Funds.
KAREN L. SEAMAN Assistant Secretary Corporate Counsel, Charles Schwab Investment Management,
February 27, 1968 Inc. From October 1994 to July 1996, she was an Attorney
for Franklin Resources, Inc. Prior to 1994, Ms. Seaman
was an Attorney for The Benham Group.
</TABLE>
Each of the above-referenced Officers and/or Trustees also serves in
the same capacity as described for the Trust for The Charles Schwab Family of
Funds, Schwab Capital Trust and Schwab Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.
23
<PAGE> 24
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Estimated
as Part of Fund Annual Benefits Total
Aggregate Expenses from upon Retirement Compensation
Name of Person, Compensation the Fund from the Fund from the Fund
Position from the Trust Complex(2) Complex(2) Complex(2)
- --------------- -------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and
Trustee
Timothy F. 0 N/A N/A 0
McCarthy ,
President and
Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer
and Trustee
Donald F. Dorward, 16,150 N/A N/A 81,100
Trustee
Robert G. Holmes, 16,150 N/A N/A 81,100
Trustee
Donald R. Stephens, 16,150 N/A N/A 81,100
Trustee
Michael W. Wilsey, 16,150 N/A N/A 81,100
Trustee
</TABLE>
(1). Figures are for the Trust's fiscal year ended August 31, 1996.
(2). "Fund Complex" comprises all 24 funds of the Trust, The Charles Schwab
Family of Funds, Schwab Capital Trust and Schwab Annuity Portfolios.
_______________________
TRUSTEE DEFERRED COMPENSATION PLAN
Pursuant to exemptive relief received by the Trust from the Securities
and Exchange Commission (the "SEC"), the Trust may enter into deferred fee
arrangements (the "Fee Deferral Plan" or the "Plan") with the Trust's Trustees
who are not "interested persons" of any of the Funds of the Trust (the
"Independent Trustees" or the "Trustees").
As of the date of this Statement of Additional Information, none of the
Independent Trustees has elected to participate in the Fee Deferral Plan. In
24
<PAGE> 25
the event an Independent Trustee does elect to participate in the Plan, the Plan
would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account") as of the
date such fees would have been paid to such Trustee. The value of the Deferred
Fee Account as of any date will be equal to the value the Account would have had
as of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the SchwabFund or SchwabFunds(R) selected by the
participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, The Charles
Schwab Family of Funds and Schwab Capital Trust.
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. The exemptive relief granted to the Trust permits the
Funds and the Trustees to purchase the Selected SchwabFund Securities, which
transactions would otherwise be limited or prohibited by the investment policies
and/or restrictions of the Funds. See "Investment Restrictions."
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds Family(R),
a family of 26 mutual funds with over $42 billion in assets as of December 15,
1996. The Investment Manager is an affiliate of: Schwab; the Trust's
distributor; the shareholder services agent; and the transfer agent. The
Advisory Agreement will continue in effect until February 23, 1997 with respect
to each of the Funds, and thereafter will continue for one year terms subject to
annual approval by: (1) the Trust's Board of Trustees or (2) a vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of a
Fund. In either event, the continuance must also be approved by a majority of
the Trust's Board of Trustees who are not parties to the Agreement or interested
persons (as defined in the 1940 Act) of any such party by vote cast in person at
a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time upon 60 days' notice by either party, or
by a majority vote of the outstanding shares of a Fund, and will terminate
automatically upon assignment.
For its advisory and administrative services to the Schwab 1000
Fund(R), the Investment Manager is entitled to receive a graduated annual fee,
payable monthly, of 0.30% of the Fund's average daily net assets not in excess
of
25
<PAGE> 26
$500 million, and 0.22% of such assets over $500 million. For its advisory and
administrative services to the Government Bond Funds, the Municipal Bond Funds
and the California Municipal Bond Funds, the Investment Manager is entitled to
receive a graduated annual fee, payable monthly, of 0.41% of each Fund's average
daily net assets.
The Investment Manager and Schwab have guaranteed that, through at
least December 31, 1997, the total fund operating expenses for the Schwab Long-
Term Tax-Free Bond Fund, the Schwab Short/Intermediate Tax-Free Bond Fund, the
Schwab California Long-Term Tax- Free Bond Fund and the Schwab California
Short/Intermediate Tax-Free Bond Fund will not exceed 0.49% of each Fund's
average daily net assets. The Investment Manager and Schwab also have guaranteed
(these guarantees may be discontinued at any time) that the total fund operating
expenses will not exceed 0.30%, 0.49% and 0.49% of the average daily net assets
for the Schwab Long-Term Government Bond Fund, the Schwab 1000 Fund and the
Schwab Short/Intermediate Government Bond Fund, respectively.
Schwab 1000 Fund. For the fiscal years ended August 31, 1994, 1995 and
1996, the investment advisory fees incurred by the Schwab 1000 Fund were
$1,554,672 (no fees were reduced), $1,640,000 (fees were reduced by $137,000)
and $2,485,000 (fees were reduced by $648,000), respectively.
The Government Bond Funds. For the fiscal years ended August 31, 1994,
1995 and 1996, the investment advisory fees incurred by the Schwab Long-Term
Government Bond Fund were $0 (fees were reduced by $18,943), $0 (fees were
reduced by $40,554) and $0 (fees were reduced by $68,000), respectively.
For the fiscal years ended August 31, 1994, 1995 and 1996, the
investment advisory fees incurred by the Schwab Short/Intermediate Government
Bond Fund were $629,913 (fees were reduced by $363,412), $439,000 (fees were
reduced by $232,000) and $453,000 (fees were reduced by $149,000), respectively.
The Municipal Bond Funds. For the fiscal years ended August 31, 1994,
1995 and 1996, the investment advisory fees incurred by the Schwab Long-Term
Tax-Free Bond Fund were $78,581 (fees were reduced by $116,810), $89,000 (fees
were reduced by $80,000) and $102,000 (fees were reduced by $75,000),
respectively.
For the fiscal years ended August 31, 1994, 1995 and 1996, the
investment advisory fees incurred by the Schwab Short/Intermediate Tax-Free Bond
Fund were $91,945 (fees were reduced by $182,991), $97,000 (fees were reduced by
$130,000) and $131,000 (fees were reduced by $85,000), respectively.
The California Municipal Bond Funds. For the fiscal years ended August
31, 1994, 1995 and 1996, the investment advisory fees incurred by the Schwab
California Long-Term Tax-Free Bond Fund were $315,733 (fees were reduced by
$182,153), $245,000 (fees were reduced
26
<PAGE> 27
by $130,000) and $297,000 (fees were reduced by $104,000), respectively.
For the fiscal years ended August 31, 1994, 1995 and 1996, the
investment advisory fees incurred by the Schwab California Short/Intermediate
Tax-Free Bond Fund were $75,136 (fees were reduced by $139,229), $77,000 (fees
were reduced by $94,000) and $118,000 (fees were reduced by $57,000),
respectively.
From time to time, each Fund may compare its total operating expense
ratio to the total operating expense ratio of other mutual funds or mutual fund
averages with similar investment objectives as reported by Lipper Analytical
Service, Inc., Morningstar, Inc. or other independent sources of such
information ("independent sources").
SUB-ADVISER
Prior to June 1, 1995, Dimensional Fund Advisors Inc. ("Dimensional")
served as the sub-adviser to the Schwab 1000 Fund(R). As of June 1, 1995, the
Investment Manager became responsible for providing all investment advisory
services to the Schwab 1000 Fund.
Under the sub-advisory agreement then in effect between Dimensional and
the Investment Manager and pursuant to Dimensional's expense reduction
agreement, the Investment Manger paid Dimensional: $504,966 for the fiscal year
ended August 31, 1994 and $436,034 for the fiscal year ended August 31, 1995.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal
underwriter for shares of the Trust and is the Trust's agent for the purpose of
the continuous offering of the Funds' shares. Each Fund pays the cost of the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under the
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory Agreement.
CUSTODIAN AND FUND ACCOUNTANT
PNC Bank, National Association, at the Airport Business Center, 200
Stevens Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for
the Trust.
PFPC, Inc., at 103 Bellevue Parkway Wilmington, Delaware 19809, serves
as Fund Accountant for the Trust.
ACCOUNTANTS AND REPORTS
TO SHAREHOLDERS
The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial statements of each series of the Trust and review
certain regulatory reports and
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<PAGE> 28
each Fund's federal income tax return. Price Waterhouse LLP also performs other
professional accounting, auditing, tax and advisory services when the Trust
engages it to do so. Shareholders will be sent audited annual and unaudited
semi-annual financial statements. The address of Price Waterhouse LLP is 555
California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, is counsel to the Trust.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Schwab 1000 Fund(R), the
Investment Manager seeks to obtain best price and execution. Subject to the
supervision of the Board of Trustees, the Investment Manager will generally
select brokers and dealers for all of the Funds primarily on the basis of the
quality and reliability of brokerage services, including execution capability
and financial responsibility. In assessing these criteria, the Investment
Manager will, among other things, monitor the performance of brokers effecting
transactions for the Funds to determine the effect, if any, the Funds'
transactions through those brokers have on the market prices of the stocks
involved. This may be of particular importance for the Schwab 1000 Fund's
investments in relatively smaller companies whose stocks are not as actively
traded as those of their larger counterparts. The Schwab 1000 Fund will seek to
buy and sell securities in a manner that causes the least possible fluctuation
in the prices of those stocks in view of the size of the transactions.
In an attempt to obtain best execution for the Schwab 1000 Fund, the
Investment Manager may also place orders for NASDAQ/NMS stocks directly with
market makers or with third market brokers, Instinet or brokers on an agency
basis. Placing orders with third market brokers or through Instinet may enable
the Schwab 1000 Fund to trade directly with other institutional holders on a net
basis. At times, this may allow the Fund to trade larger blocks than would be
possible trading through a single market maker.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
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<PAGE> 29
In determining when and to what extent to use Schwab or any other
affiliated broker-dealer as its broker for executing orders for the Schwab 1000
Fund(R) on securities exchanges, the Investment Manager will consider (if
relevant) whether the compensation to be paid Schwab or any other affiliated
broker- dealer will be (i) fair and reasonable, (ii) at least as favorable to
the Fund as commissions that would be charged by other qualified brokers having
comparable execution capabilities and (iii) at least as favorable as commissions
contemporaneously charged by Schwab or any other affiliated broker-dealer on
comparable transactions for its most favored unaffiliated customers. The Fund
does not consider it practicable or in the best interests of its shareholders to
solicit competitive bids for commission rates on each transaction. However, the
Board of Trustees, including a majority of the Trustees who are not "interested
persons" of Schwab or any other affiliated broker-dealer within the meaning of
the 1940 Act, (i) has prescribed procedures designed to provide that the Fund
does not pay commissions that do not meet the standards described above, (ii)
reviews those procedures annually to determine whether they remain adequate and
(iii) considers quarterly whether or not the commissions charged by Schwab or
any other affiliated broker-dealer have met the standards.
Brokerage services Schwab provides to the Schwab 1000 Fund(R) are also
subject to Rule 11a2-2(T) under the Securities Exchange Act of 1934, as amended.
Rule 11a2-2(T) permits the Fund to use Schwab as a broker provided certain
conditions are met. Among these requirements are that members of the exchange
not associated with Schwab perform the floor brokerage element of portfolio
transactions (that is, execution on the exchange floor or through use of
exchange facilities), that the orders to such members be transmitted from off
the exchange floor and that neither Schwab nor an associated person of Schwab
participates in the execution of the transaction after the order has been so
transmitted. In connection with transactions in which Schwab acts as broker for
the Schwab 1000 Fund, Schwab, while not permitted to perform floor brokerage
(which is undertaken by members Schwab selects who are not associated with that
firm), still continues to bear principal responsibility for determining
important elements of overall execution such as timing and order size, and also
clears and settles such transactions. Schwab pays the fees charged by those
persons performing the described floor brokerage elements. Schwab will not trade
directly with the Funds in any transactions in which Schwab or an affiliate acts
as principal.
Brokerage Commissions. For the fiscal years ended August 31, 1994, 1995
and 1996, the Schwab 1000 Fund(R) paid brokerage commissions of $50,000,
$118,000 and $408,000. Of the brokerage commissions paid in 1996, $1,000 (0.25%
of the total amount) was paid to Schwab, an affiliated person of the Fund; 0.54%
of the transactions involving the payment of a brokerage commission in 1996 were
effected through Schwab. The Government Bond Funds, Municipal Bond Funds and
California Municipal Bond
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<PAGE> 30
Funds paid no brokerage commissions for each such Fund's last three fiscal
years, respectively.
PORTFOLIO TURNOVER
For reporting purposes, each Fund's turnover rate is calculated by
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
the Fund owned during the fiscal year. When the Fund makes the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded. A 100% portfolio turnover rate would
occur, for example, if all portfolio securities (aside from short-term
securities) were sold and either repurchased or replaced once during the fiscal
year.
From time to time, each Fund may compare its portfolio turnover rate
with that of other mutual funds as reported by independent sources.
Schwab 1000 Fund(R). The Schwab 1000 Fund's portfolio turnover rates
were 2% for each of the fiscal years ended August 31, 1995 and 1996.
The Government Bond Funds. The portfolio turnover rates for the Schwab
Long-Term Government Bond Fund for the fiscal years ended August 31, 1995 and
1996 were 240% and 66%, respectively. The portfolio turnover rates for the
Schwab Short/Intermediate Government Bond Fund for the fiscal years ended August
31, 1995 and 1996 were 203% and 80%, respectively.
The Municipal Bond Funds. The portfolio turnover rates for the Schwab
Long-Term Tax-Free Bond for the fiscal years ended August 31, 1995 and 1996 were
70% and 50%, respectively. The portfolio turnover rates for the Schwab
Short/Intermediate Tax-Free Bond Fund for the fiscal years ended August 31, 1995
and 1996 were 35% and 44%, respectively.
The California Municipal Bond Funds. The portfolio turnover rates for
the Schwab California Long-Term Tax-Free Bond Fund for the fiscal years ended
August 31, 1995 and 1996 were 46% and 36%, respectively. The portfolio turnover
rates for the Schwab California Short/Intermediate Tax-Free Bond Fund for the
fiscal years ended August 31, 1995 and 1996 were 62% and 20%, respectively.
TAXES
FEDERAL INCOME TAX
It is each Fund's policy to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Code. By
following this policy, each Fund expects to eliminate or reduce to a nominal
amount the federal income tax to which it is subject.
30
<PAGE> 31
In order to qualify as a regulated investment company, each of the
Funds must, among other things, (1) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stocks, securities, foreign currencies or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
derive less than 30% of its gross income from gains from the sale or other
disposition of certain assets (including stocks and securities) held for less
than three months; and (3) diversify its holdings so that at the end of each
quarter of its taxable year (i) at least 50% of the market value of the Fund's
total assets is represented by cash or cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of any other regulated investment company) or of two or more issuers
that the Fund controls, within the meaning of the Code, and that are engaged in
the same, similar or related trades or businesses. These requirements may
restrict the degree to which a Fund may engage in short-term trading and certain
hedging transactions and may limit the range of a Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
meets certain minimum distribution requirements. To comply with these
requirements, a Fund must distribute at least (a) 90% of its "investment company
taxable income" (as that term is defined in the Code) and (b) 90% of the excess
of its (i) tax-exempt interest income over (ii) certain deductions attributable
to that income (with certain exceptions), for its taxable year. Each Fund
intends to make sufficient distributions to shareholders to meet these
requirements.
The Code imposes a non-deductible excise tax on regulated investment
companies that do not distribute in a calendar year (regardless of whether they
otherwise have a non-calendar taxable year) an amount equal to 98% of their
"ordinary income" (as defined in the Code) for the calendar year plus 98% of
their capital gain net income for the one-year period ending on October 31 of
such calendar year, plus any undistributed amounts from prior years. For the
foregoing purposes, a Fund is treated as having distributed any amount on which
it is subject to income tax for any taxable year ending in such calendar year.
If the distributions during a calendar year are less than the required amount,
the Fund is subject to a non-deductible excise tax equal to 4% of the
deficiency.
A Fund's transactions in futures contracts and options and certain
other investment and hedging activities are subject to special tax rules. In a
given
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<PAGE> 32
case, these rules may accelerate income to a Fund, defer its losses, cause
adjustments in the holding periods of the Fund's assets, convert short-term
capital losses into long-term capital losses or otherwise affect the character
of the Fund's income. These rules could therefore affect the amount, timing and
character of distributions to shareholders. Income earned as a result of these
transactions would, in general, not be eligible for the corporate dividends
received deduction when distributed to corporate shareholders. The Funds will
endeavor to make any available elections pertaining to these transactions in a
manner believed to be in the best interest of the Funds and their shareholders.
Any dividends declared by the Funds in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year declared. A Fund may adjust its schedule for the
reinvestment of distributions for the month of December to assist in complying
with the reporting and minimum distribution requirements of the Code.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from net investment income and
short-term capital gains. Distributions to foreign shareholders of long-term
capital gains and any gains from the sale or other disposition of shares of the
Funds are generally not subject to U.S. taxation, unless the recipient is an
individual who meets the Code's definition of "resident alien." Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above. Distributions by a Fund may also be
subject to state, local and foreign taxes, and their treatment under applicable
tax laws may differ from the federal income tax treatment.
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<PAGE> 33
SCHWAB LONG-TERM TAX-FREE BOND FUND, SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND
FUND, SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND AND SCHWAB CALIFORNIA
SHORT/INTERMEDIATE TAX-FREE BOND FUND
The Code permits a regulated investment company that invests at least
50% of its assets at the close of each quarter in Municipal Securities to pass
through to its investors, on a tax-exempt basis, net Municipal Securities
interest income. An exempt-interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Schwab Long-Term Tax-Free Bond
Fund, Schwab Short/Intermediate Tax-Free Bond Fund, Schwab California Long-Term
Tax-Free Bond Fund, and Schwab California Short/Intermediate Tax-Free Bond Fund
and designated as an exempt-interest dividend in a written notice mailed to
shareholders after the close of such Fund's taxable year, but not to exceed in
the aggregate the net Municipal Securities interest income received by each such
Fund during the taxable year. The percentage of the total dividends paid during
any taxable year that is designated as exempt-interest dividends will be uniform
throughout such year for all shareholders receiving dividends from each Fund
during such year, and may differ from the percentage of exempt income actually
received by a Fund during the period for which the Shares were held. If for any
taxable year the Schwab Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate
Tax-Free Bond Fund, Schwab California Long-Term Tax-Free Bond Fund, or Schwab
California Short/Intermediate Tax-Free Bond Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
its taxable income will be subject to federal tax at regular corporate rates
(without any deduction for distributions to its shareholders) when distributed,
and Municipal Securities interest income, although not taxed to the Funds, would
be taxable to shareholders. To the extent dividends paid to shareholders are
derived from taxable interest or short-term or long-term capital gains, such
dividends will be subject to federal income tax whether such dividends are paid
in the form of cash or additional shares.
A shareholder should consult his or her own tax adviser with respect to
whether exempt-interest dividends would be excludable from gross income if the
shareholder were treated as a "substantial user" of facilities financed by an
obligation held by either Fund or a "related person" to such user under the
Code. Any loss on the sale or exchange of any share held for six months or less
will be disallowed to the extent of the amount of the exempt-interest dividend
received with respect to such share. The U.S. Treasury Department is authorized
to issue regulations reducing the period to not less than 31 days for certain
regulated investment companies. No such regulations have been issued as of the
date of this Statement of Additional Information.
All or part of interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of a Fund will not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of that Fund's total distributions
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<PAGE> 34
(excluding distributions of the excess of net long-term capital gains over net
short-term capital losses) paid to the shareholder that are exempt-interest
dividends. Under rules used by the Internal Revenue Service, the purchase of
shares of a Fund may be considered to have been made with borrowed funds even
though such funds are not directly traceable to the purchase of the shares.
The discussion of federal income taxation presented above summarizes
only some of the important federal tax considerations generally affecting
purchasers of Fund shares. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund and its shareholders,
and the discussion is not intended as a substitute for careful tax planning.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in a Fund.
STATE OF CALIFORNIA TAXES
With respect to each California Municipal Bond Fund, if, at the close
of each quarter of its taxable year, at least 50% of the value of the total
assets of the Fund consists of obligations the interest on which is exempt from
California personal income taxation under the Constitution or laws of California
or of the United States ("California Exempt Obligations"), then the Fund will be
qualified to pay dividends exempt from State of California personal income tax
to its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). The California Municipal Bond Funds intend to
qualify under the above requirement so that they can pay California
exempt-interest dividends. If a California Municipal Bond Fund fails to so
qualify, none of its dividends will be exempt from State of California personal
income tax.
Not later than 60 days after the close of its taxable year, each
California Municipal Bond Fund will notify each shareholder of the portion of
the dividends paid by it to the shareholder with respect to such taxable year
which is exempt from State of California personal income tax. The total amount
of California exempt-interest dividends paid by a California Municipal Bond
Fund to all of its shareholders with respect to any taxable year cannot exceed
the amount of interest received by the Fund during such year on California
Exempt Obligations, less any expenses or expenditures (including any
expenditures attributable to the acquisition of additional securities for the
California Municipal Bond Funds) that are deemed to have been paid from such
interest. Dividends paid by the California Municipal Bond Funds in excess of
this limitation will be subject to State of California personal income tax. For
purposes of this limitation, expenses or other expenditures paid during any year
generally will be deemed to have been paid with funds attributable to interest
received by the Fund from California Exempt Obligations for such year in the
same ratio as such interest from California Exempt Obligations for such year
bears to the total gross income earned by the Fund for the year. The effect of
this accounting convention is that
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<PAGE> 35
amounts of interest from California Exempt Obligations received by the
California Municipal Bond Funds that would otherwise be available for
distribution as California exempt- interest dividends will be reduced by the
expenses and expenditures deemed to have been paid from such amounts.
To the extent, if any, dividends paid to shareholders are derived from
long-term and short-term capital gains, such dividends will not constitute
California exempt-interest dividends. Rules similar to those regarding the
treatment of such dividends for federal income tax purposes are also applicable
for State of California personal income tax purposes. Moreover, interest on
indebtedness incurred by a shareholder to purchase or carry shares of a
California Municipal Bond Fund is not deductible for State of California
personal income tax purposes if the Fund distributes California exempt-interest
dividends to the shareholder during his or her taxable year.
The foregoing is a summary of only some of the important State of
California personal income tax considerations generally affecting the California
Municipal Bond Funds and their shareholders. No attempt is made to present a
detailed explanation of the State of California personal income tax treatment of
the California Municipal Bond Funds or their shareholders, and this discussion
is not intended as a substitute for careful planning. Further, it should be
noted that the portions of the California Municipal Bond Funds' dividends
constituting California exempt-interest dividends are excludable from income for
State of California personal income tax purposes only. Any dividends paid to
shareholders of the California Municipal Bond Funds subject to State of
California franchise or corporate income tax will be taxed as ordinary dividends
to such shareholders, notwithstanding that all or a portion of such dividends
are exempt from State of California personal income tax. Accordingly, potential
investors in the California Municipal Bond Funds, including, in particular,
corporate investors that may be subject to California franchise or corporate
income tax, should consult their tax advisers with respect to the application of
such tax to the receipt of the California Municipal Bond Funds' dividends and as
to their own State of California tax situation, in general.
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<PAGE> 36
SHARE PRICE CALCULATION
Each Fund's net asset value per share is determined each day the New
York Stock Exchange is open for trading as of 4:00 p.m., Eastern time.
Currently, the New York Stock Exchange is closed on the following holidays: New
Year's Day (observed), Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The Funds value their
portfolio securities daily based on their fair value. Securities traded on stock
exchanges are valued at the last quoted sales price on the exchange on which
such securities are primarily traded, or, lacking any sales, at the mean between
the bid and ask prices. Investments in mutual funds are valued at their
respective net asset values, as determined by those funds. Securities traded in
the over-the-counter market are valued at the last sales price that day, or if
no sales that day, at the mean between the bid and ask prices. In addition,
securities that are primarily traded on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective exchanges
with these values then translated into U.S. dollars at the current exchange
rate. Foreign securities for which the closing values are not readily available
are valued at fair value as determined in good faith pursuant to the Board of
Trustees guidelines. Securities for which market quotations are not readily
available (including restricted securities that are subject to limitations on
their sale) are valued at fair value as determined in good faith pursuant to
the Trust's Board of Trustees guidelines.
Securities may be valued on the basis of prices provided by pricing
services when such prices are believed to reflect fair market value.
From time to time, each Fund may report its net asset value per share
over a specified period. Each Fund's net asset value, for the periods set forth,
may be compared to net asset values for other mutual funds with similar
investment objectives as reported by independent sources.
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<PAGE> 37
TOTAL RETURN AND YIELD
STANDARDIZED TOTAL RETURN
Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in a Fund
made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, a Fund
assumes the reinvestment of all distributions at net asset value on applicable
reinvestment dates.
<TABLE>
<CAPTION>
Average annual total return
Total return for the fiscal year from commencement of
ended August 31, 1996 operations to August 31, 1996
--------------------------------- -----------------------------
<S> <C> <C>
Schwab 1000 Fund(R) 17.27% 3.49%
Schwab Long-Term Government 2.29% 4.92%
Bond Fund
Schwab Short/Intermediate 4.39% 5.48%
Government Bond Fund
Schwab Long-Term Tax-Free Bond 4.87% 5.89%
Fund
Schwab Short/Intermediate Tax-Free 3.32% 4.09%
Bond Fund
Schwab California Long-Term Tax- 6.43% 7.20%
Free Bond Fund
Schwab California 4.11% 4.19%
Short/Intermediate Tax-Free Bond
Fund
</TABLE>
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for a Fund differs from standardized total
return in that it relates to periods other than the period for standardized
total return and/or that it represents aggregate (rather than average) total
return.
In addition, an after-tax total return for the Schwab 1000 Fund(R) may
be calculated by taking the Fund's standardized or non-standardized total return
and subtracting applicable federal taxes from the portion of the Fund's total
return attributable to capital gains distributions and ordinary income. This
after-tax total return may be compared to
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<PAGE> 38
that of other mutual funds with similar investment objectives as reported by
independent sources.
In addition, the Schwab 1000 Fund may report the percentage of the
Fund's standardized or non-standardized total return which would be paid to
taxes annually (at the applicable federal personal income and capital gains tax
rates) before redemption of Fund shares. This proportion may be compared to that
of other mutual funds with similar investment objectives as reported by
independent sources.
YIELD
A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Fund over a specific 30 day period. This net
investment income is then annualized, which means that the net investment income
generated during the 30-day period is assumed to be generated in each 30-day
period over an annual period, and is shown as a percentage of the investment.
<TABLE>
<CAPTION>
Fund 30-day period ended August 31, 1996
- ---- ----------------------------------
<S> <C>
Schwab Long-Term Government Bond Fund 7.23%
Schwab Short/Intermediate Government Bond Fund 5.77%
Schwab Long-Term Tax-Free Bond Fund 5.30%
Schwab Short/Intermediate Tax-Free Bond Fund 4.03%
Schwab California Long-Term Tax-Free Bond Fund 5.34%
Schwab California Short/Intermediate Tax-Free Bond 4.20%
Fund
</TABLE>
EFFECTIVE YIELD
A Fund's effective yield is calculated similarly, but the net
investment income earned by the investment is assumed to be compounded monthly
when annualized. The effective yield will be slightly higher than the yield due
to this compounding effect.
TAX EQUIVALENT YIELD AND
TAX EQUIVALENT EFFECTIVE YIELD
The tax equivalent yield of the Municipal Bond Funds and the California
Municipal Bond Funds is calculated by dividing that portion of the applicable
fund's yield (computed as described above) that is tax-exempt by an amount equal
to one minus the applicable effective tax
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<PAGE> 39
rate, and adding the result to that portion, if any, of the yield of the Fund
that is not tax-exempt. For the Municipal Bond Funds, the maximum federal
marginal rate of 39.6% is normally used; for the California Municipal Bond
Funds, a combined rate of the maximum federal marginal rate of 39.6% and the
California marginal rate of 9.3% is normally used.
<TABLE>
<CAPTION>
Taxable equivalent yield
for 30-day period ended
Fund August 31, 1996
- ---- ------------------------
<S> <C>
Schwab Long-Term Tax-Free Bond Fund 8.77%
Schwab Short/Intermediate Tax-Free Bond Fund 6.67%
Schwab California Long-Term Tax-Free Bond Fund 8.84%
Schwab California Short/Intermediate Tax-Free 6.95%
Bond Fund
</TABLE>
Tax equivalent effective yields are computed in the same manner as tax
equivalent yields, except that effective yield is substituted for yield in the
calculation. In calculating tax equivalent yields and effective yields the
California Municipal Bond Funds generally assume an effective tax rate
(combining the federal 39.6% rate and the California 9.3% rate, and assuming the
taxpayer deducts California state taxes paid) of 45.22%. The effective tax rates
used in determining such yields do not reflect the tax costs resulting from the
full or partial loss of the benefits of personal exemptions, itemized deductions
and California exemption credits that may result from the receipt of additional
taxable income by taxpayers with adjusted gross incomes exceeding $117,950 (for
joint returns) or $58,975 (for separate returns) for 1996. Actual tax equivalent
yields and tax equivalent effective yields may be higher for taxpayers subject
to the loss of these benefits than the rates reported by the Funds.
TAX-EXEMPT VERSUS TAXABLE YIELD
Investors may want to determine which investment, tax-exempt or
taxable, will provide a higher after-tax return. To determine the tax equivalent
yield, or tax equivalent effective yield, simply divide the yield or effective
yield of the Municipal Bond Funds or the California Municipal Bond Funds by 1
minus your marginal federal tax rate (or combined state and federal tax rate in
the case of the California Municipal Bond Funds). Note, however, that as
discussed above, full or partial loss by certain investors of the described
federal tax benefits could cause the resulting figure to understate the
after-tax return produced by the Fund in question.
39
<PAGE> 40
From time to time, each Fund may report on the dividends paid to
shareholders over a specified period of time.
SCHWABFUNDS(R) INVESTMENT STRATEGIES
INDEXING AND THE SCHWAB 1000
INDEX(R) AND FUND
The returns produced by the U.S. stock market during the 25 years
ending December 31, 1994 have been exceeded by those of very few types of
securities investments. Because the unmanaged performance of the U.S. stock
market has often proven superior to that of many individually selected stock
portfolios, a growing percentage of assets invested in the equity markets are
being placed in "index" portfolios. Institutional investors often devote a
substantial percentage of their assets to indexed strategies.
The historical superiority of a long-term investment in a group of
common stocks representative of the stock market as a whole is illustrated in
the graph and table below. It may be seen that the cumulative 25 year total
return of the Schwab 1000 Index significantly exceeds that of U.S. Treasury
Bills (obligations which, when issued, have maturities of one year or less), and
long-term Government Bonds (bonds issued by the U.S. Treasury which at issue
have maturities of at least 10 but no more than 30 years) and is well above the
rate of inflation as represented by the Consumer Price Index ("CPI"). While
common stock prices fluctuated during the years 1978 through 1994, they were
substantially higher at the end than the beginning of the period. The historical
data presented is not indicative of future results.
Schwab 1000 Index data assumes the reinvestment of dividends, but does
not reflect deductions for administrative and management costs and expenses. The
Fund will be subject to these costs and expenses. In addition, various factors
may cause the Fund's performance to be higher or lower than that of the Index.
(See "Investment Objective and Policies.") The Schwab 1000 Index was first made
available to the public on February 1, 1991.
The cumulative total return figures reported for the Schwab 1000 Index
for the period prior to February 1, 1991 reflect the historical performance of
the Index as if the Index had been in existence for the entire period. Investors
should be aware that they cannot invest directly in an index.
An index typically tracks the performance of a group of securities
selected to represent a particular market, and is most often used to gauge that
market's performance. The Dow Jones Industrial Average and Standard & Poor's 500
Index(R) ("S&P 500") are two indices designed to measure the performance of U.S.
stocks. As of December 16, 1996, the market capitalization of the stocks
included in these indices represent
40
<PAGE> 41
approximately 16.8% and 71.8%, respectively, of the U.S. stock market's total
value. When investment managers invest indexed separate accounts or index fund
assets, they attempt to replicate the performance of the applicable target index
by holding all or a representative sample of the securities included in the
index.
The Schwab 1000 Index is a broad-based stock market index which
contains the common stocks of the 1,000 largest operating companies (i.e.,
non-investment companies) incorporated in the United States. As the stocks
contained in the index represent about 84% of the total market capitalization of
all U.S. companies, as represented by the Wilshire 500 Index, the Schwab 1000
Index provides a reliable measure of broad market performance and can serve as a
benchmark against which individual investors can compare the performance of
their equity investments. Relative to some indices that primarily track one
group of stocks, and as a result do not capture movements in other areas of the
market, the Schwab 1000 Index(R), because it contains the stocks of the more
established blue-chip companies as well as those of relatively smaller
companies, reflects an expanded breadth of market coverage. This distinction is
important because historically the stocks of smaller companies have
out-performed those of their blue-chip counterparts in some years, while the
reverse has been true in other years. Of course, past performance may not
necessarily be indicative of future results.
From time to time, the Schwab 1000 Fund(R) may compare the historical
performance of the Schwab 1000 Index to the historical performance of various
other indices, including the S&P 500, as reported by independent sources.
Charles R. Schwab, a veteran investor, was instrumental in developing
the Schwab 1000 Fund The investment objective of the Fund, which is designed to
make indexed investing available with a high level of convenience and economy,
is to match the total return of the Schwab 1000 Index.
The Schwab 1000 Fund is managed to offset capital gains with capital
losses in order to minimize the distribution of capital gains to shareholders.
This special feature of the Schwab 1000 Fund can make a real difference in an
investor's after-tax return, especially if the investor is in a high tax
bracket. The Schwab 1000 Fund has adopted a number of policies that should cause
its portfolio turnover rate to be below the portfolio turnover rate of many
other mutual funds. A lower portfolio turnover rate acts to minimize associated
transaction costs as well as the level of realized capital gains. By avoiding,
where possible, the distribution of capital gains to shareholders, the Schwab
1000 Fund helps to build the value of an investor's shares and defer payment of
capital gains taxes until redemption of the those shares. Current tax liability
for capital gains should be reduced and total return increased by these
policies.
The Schwab 1000 Fund may, from time to time, refer to recent studies
that analyze certain techniques and strategies
41
<PAGE> 42
which the Schwab 1000 Fund uses. In addition, the Schwab 1000 Fund may, from
time to time, promote the advantages of investing in a series that is part of a
large, diverse mutual fund complex.
42
<PAGE> 43
The data reported below is current as of December 1996. The Source for all
information below is Morningstar, Inc., with the exception of the data for the
Schwab 1000 Index (R) which is from Schwab's Mutual Fund Research Group.
[The following is a line chart comparing the Schwab 1000 Index, S&P 500 Index,
3-Month CDs, Corporate Bonds, Treasury Bills and Inflation (CPI).]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SCHWAB 1000 S&P 500 3-MONTH CORPORATE TREASURY INFLATION
INDEX INDEX(R) CD'S BONDS BILLS (CPI)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1979 21.34% 18.30% 11.22% -2.12% 10.04% 13.29%
1980 61.20% 56.43% 25.69% -2.42% 22.79% 27.46%
1981 54.95% 48.49% 45.68% 0.49% 39.98% 38.82%
1982 87.60% 80.36% 63.50% 39.90% 54.96% 44.14%
1983 128.48% 120.86% 78.33% 52.89% 68.32% 49.61%
1984 142.83% 134.70% 96.80% 78.30% 84.43% 55.53%
1985 221.19% 209.19% 112.65% 121.21% 98.23% 61.46%
1986 277.88% 266.94% 126.49% 157.73% 110.04% 63.24%
1987 289.34% 286.25% 142.02% 164.30% 122.26% 70.38%
1988 355.39% 350.40% 160.70% 188.66% 137.07% 77.99%
1989 492.10% 493.11% 184.36% 229.04% 156.34% 86.26%
1990 465.16% 474.63% 207.57% 252.58% 175.61% 97.62%
1991 656.08% 649.79% 225.50% 317.84% 190.55% 103.71%
1992 723.39% 706.94% 237.51% 354.18% 200.56% 109.59%
1993 807.71% 788.19% 248.26% 409.44% 209.57% 115.36%
1994 812.12% 799.80% 264.41% 389.44% 222.80% 121.11%
1995 1153.81% 1137.43% 286.08% 498.27% 240.60% 126.72%
</TABLE>
43
<PAGE> 44
ASSET ALLOCATION STRATEGIES USING
SCHWABFUNDS(R)
Shareholders of SchwabFunds may wish to invest in the SchwabFunds as
components of their personal asset allocation plan. An asset allocation program
is available through Schwab. This program may help shareholders select
investments, including investments in SchwabFunds, that match their individual
investment needs. The shareholders' personal investment plan is based on a
number of factors, including personal financial situation, time horizon,
investment objectives and goals and risk tolerance.
ACCESS TO SCHWAB'S MUTUAL
FUND ONESOURCE(R) SERVICE
With Schwab's Mutual Fund OneSource Service ("OneSource"), a
shareholder can invest in over 575 mutual funds from many fund companies,
subject to the following. Schwab's standard transaction fee will be charged on
each redemption of fund shares held for 90 days or less to discourage short-term
trading. Mutual fund shares held for more than 90 days are exempt from the
short-term redemption policy and may be sold without penalty. Up to 15
short-term redemption of fund shares per calendar year are permitted. If you
exceed this number, you will no longer be able to buy or sell fund shares
without paying a transaction fee. As a courtesy, we will notify you in advance
if your short-term redemptions are nearing the point where all of your future
trades will be subject to transaction fees. Schwab reserves the right to modify
OneSource's terms and conditions at any time. For more information, a
shareholder call 800-2 NO-LOAD, 24 hours a day.
From time to time, the Schwab 1000 Fund(R) may include discussions in
advertisements of the income tax savings shareholders may experience as a result
of the Schwab 1000 Fund's policy of limiting portfolio trading in order to
reduce capital gains. This information may be supplemented by presentations of
statistical data illustrating the extent of such income tax savings and the
impact of such savings on the yield and/or total return of the Schwab 1000 Fund.
In addition, such advertisements may include comparisons of the Schwab 1000
Fund's performance against that of investment products that do not employ the
Schwab 1000 Fund's policy of seeking to limit capital gains.
The Schwab 1000 Fund is intended to make indexed investing easily
available to Schwab customers with the highest level of convenience and economy
thereby facilitating their ability to participate in the long-term performance
of the U.S. stock market.
44
<PAGE> 45
GENERAL INFORMATION
The Trust generally is not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
removal of Trustees if a meeting is requested in writing by a shareholder or
shareholders who beneficially own(s) 10% or more of the Trust's shares; (2)
adoption of any contract for which shareholder approval is required by the 1940
Act; (3) any termination of the Trust to the extent and as provided in the
Declaration of Trust; (4) any amendment of the Declaration of Trust (other than
amendments changing the name of the Trust or any of its investment portfolios,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); (5) determining
whether a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or the
shareholders, to the same extent as the stockholders of a Massachusetts business
corporation; and (6) such additional matters as may be required by law, the
Declaration of Trust, the Bylaws or any registration of the Trust with the SEC
or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to a Fund's fundamental investment
objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing Trustees and until the election and
qualification of his or her successor or until death, resignation, retirement or
removal by a majority vote of the shares entitled to vote (as described below)
or of a majority of the Trustees. In accordance with the 1940 Act, (i) the Trust
will hold a shareholder meeting for the election of Trustees when less than a
majority of the Trustees have been elected by shareholders and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
Trustee have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such
for at least six months and who hold shares constituting at least 1% of the
Trust's outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.
The Bylaws provide that the presence at a shareholder meeting in person
or by proxy of at least 30% of the shares entitled to vote on a matter shall
constitute a quorum, unless otherwise provided by the 1940 Act or other
applicable law. Thus, even if less than a majority of shareholders were
45
<PAGE> 46
represented, a meeting of the Trust's shareholders could occur. Attending
shareholders would in such case be permitted to take action not requiring the
vote of more than a majority of a quorum. Some matters requiring a larger vote
under the Declaration of Trust, such as termination or reorganization of the
Trust, and certain amendments of the Declaration of Trust, could not be decided
at such a meeting; nor could matters which under the 1940 Act require the vote
of a "majority of the outstanding voting securities" as defined in the 1940 Act.
The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Trust (or any of its investment portfolios) by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance which the Trustees consider adequate to
cover foreseeable tort claims.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote, because it is limited to
circumstances in which a disclaimer is inoperative and the Trust itself is
unable to meet its obligations.
PRINCIPAL HOLDERS OF SECURITIES
As of December 10, 1996, I A B C One Hallidie Plaza #600, San
Francisco, California directly or beneficially owned 6.35% of the Schwab
Long-Term Government Bond Fund.
In addition, as of December 10, 1996, the officers and trustees of the
Trust, as a group, owned less than 1% of each Fund's outstanding voting
securities.
For further information, please refer to the registration statement and
exhibits for the Trust on file with the SEC in Washington, D.C. and available
upon payment of a copying fee. The statements in the Prospectus and this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
46
<PAGE> 47
SCHWABFUNDS(R)
SchwabFunds offers a variety of series and classes of shares of beneficial
interest to help you with your investment needs.
EQUITY FUNDS
Schwab 1000 Fund(R)(1)
Schwab International Index Fund(R)(2)
Schwab Small-Cap Index Fund(R)(2)
Schwab Asset Director(R)-High Growth Fund(2)
Schwab Asset Director(R)-Balanced Growth Fund(2)
Schwab Asset Director(R)-Conservative Growth Fund(2)
Schwab S&P 500 Fund-Investor Shares(2)
Schwab S&P 500 Fund-e.Shares(TM)(2), (3)
Schwab Analytics Fund(TM)(2)
Schwab OneSource Portfolios-International
Schwab OneSource Portfolios-Growth Allocation
Schwab OneSource Portfolios-Balanced Allocation
FIXED INCOME FUNDS(1)
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund(4)
Schwab California Long-Term Tax-Free Bond Fund(4)
MONEY MARKET FUNDS(5)
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(R)
Schwab Municipal Money Fund-Sweep Shares
Schwab Municipal Money Fund-Value Advantage Shares(TM)
Schwab California Municipal Money Fund-Sweep Shares
Schwab California Municipal Money Fund-Value Advantage Shares(TM)
Schwab Retirement Money Fund(R)(6)
Schwab Institutional Advantage Money Fund(R)(6)
Schwab New York Municipal Money Fund-Sweep Shares
Schwab New York Municipal Money Fund-Value Advantage Shares(TM)
(1) The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of the Trust.
(2) The Funds are separate investment portfolios or classes of shares of Schwab
Capital Trust.
(3) Available only through SchwabLink(TM).
(4) Available only to California residents and residents of selected other
states.
(5) All listed money market funds are separate investment portfolios of The
Charles Schwab Family of Funds.
(6) Designed for institutional investors only.
47
<PAGE> 48
PURCHASE AND REDEMPTION OF SHARES
Each Fund's minimum initial investment requirement is $1,000 ($500 for
Custodial Accounts, Individual Retirement Accounts and certain other retirement
plans). Subsequent investments of $100 or more may be made. These minimum
investment requirements may be changed at any time and are not applicable to
certain types of investors. The Trust may waive the minimums for purchases by
Trustees, Directors, officers or employees of the Trust, Schwab or the
Investment Manager.
The Trust has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90- day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of the stated limits may be paid, in whole or in
part, in investment securities or in cash, as the Trust's Board of Trustees may
deem advisable; however, payment will be made wholly in cash unless the Board of
Trustees believes that economic or market conditions exist that would make such
a practice detrimental to the best interests of the Fund. If redemption proceeds
are paid in investment securities, such securities will be valued as set forth
in the Prospectus of the Fund affected under "Share Price Calculation" and a
redeeming shareholder would normally incur brokerage expenses if he or she were
to convert the securities to cash.
OTHER INFORMATION
The Prospectuses of the Funds and this Statement of Additional
Information do not contain all the information included in the Registration
Statement filed with the SEC under the Securities Act of 1933, as amended, with
respect to the securities offered by the Prospectuses. Certain portions of the
Registration Statement have been omitted from the Prospectuses and this
Statement of Additional Information pursuant to the rules and regulations of the
SEC. The Registration Statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information
48
<PAGE> 49
form a part, each such statement being qualified in all respects by such
reference.
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY
THE TRUST, ANY SERIES THEREOF, OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
49
<PAGE> 50
APPENDIX - RATINGS OF INVESTMENT SECURITIES
From time to time, each Fund may report the percentage of its assets
which fall into the rating categories set forth below.
BONDS
MOODY'S INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with Aaa
rated bonds, they comprise what are generally known as high grade bonds. Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protection, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks. A rated bonds are considered
as upper-medium grade obligations as they possess many favorable investment
attributes. Bonds designated Baa are considered medium grade in that they are
not highly protected nor poorly secured. Interest payments and principal
security appear to be adequate at the present, but they may lack certain
protective elements or be characteristically unreliable over any great length of
time. Baa bonds do not have any outstanding investment characteristics and do
have speculative characteristics.
STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree. A
ratings are given to debt which has a strong capacity to pay interest and repay
principal but is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than higher rated debt. BBB debt indicates
the issuer is regarded by S&P as having an adequate capacity to pay interest and
repay principal. These securities appear to have adequate protection, however
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal in this category than in
higher categories.
DUFF & PHELPS CREDIT RATING CO.
Duff confers an AAA designation to bonds of issuers with the highest
credit
50
<PAGE> 51
quality. The risk factors associated with these bonds are negligible, being only
slightly more than for risk-free U.S. Treasury debt. AA rated bonds are of high
credit quality and have strong protection factors. The risks associated with
them are modest but may vary slightly from time to time because of economic
conditions. An A rating indicates that the protection factors are average but
adequate. The risk factors, however, are more variable and greater in periods of
economic stress. BBB rated debt has protection factors that are below average
but still sufficient for prudent investment. There is considerable variability
in the risk of BBB rated debt during economic cycles.
FITCH INVESTOR SERVICES, INC.
AAA is the highest rating Fitch assigns to bonds, and indicates the
obligor's exceptionally strong ability to pay interest and repay principal.
Bonds which Fitch considers of very high credit quality, and the obligor's
ability to pay interest and repay principal is very strong, although not as
strong as AAA, is rated AA. An A rating is given to show high credit quality and
the issuer's ability to pay interest and repay principal is strong, but there is
more vulnerability to economic conditions and circumstances than higher rated
debt. BBB bonds are considered investment grade, where the issuer has adequate
ability to pay interest and repay principal. Bonds rated BBB are more
susceptible to adverse changes in economic conditions and circumstances, thus
these bonds are more likely to fall below investment grade or have the
timeliness of their payments impaired.
SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
MOODY'S INVESTORS SERVICE
Short-term notes/variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality, enjoying
strong protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-3 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a
strong capacity to pay principal and interest. Issues determined to possess very
strong safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.
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<PAGE> 52
IBCA
Obligations supported by the highest capacity for timely repayment are
rated A1+. An A1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated A2 are supported by a
good capacity for timely repayment, although adverse changes in business,
economic, or financial conditions may affect this capacity.
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers (or related supporting institutions) of commercial paper with this
rating are considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates a strong degree of safety regarding timely payment of principal and
interest. Issues determined to possess overwhelming safety characteristics are
denoted A-1+. Capacity for timely payment on commercial paper rated A-2 is
satisfactory, but the relative degree of safety is not as high as for issues
designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Duff-1 is the highest commercial paper rating assigned by Duff. Three
gradations exist within this rating category: A Duff-1+ rating indicates the
highest certainty of timely payment (issuer short-term liquidity is found to be
outstanding and safety is deemed to be just below that of risk-free short-term
U.S. Treasury obligations), a Duff-1 rating signifies a very high certainty of
timely payment (issuer liquidity is determined to be excellent and risk factors
are considered minor) and a Duff-1- rating denotes high certainty of timely
payment (issuer liquidity factors are strong and risk is very small). A Duff-2
rating indicates a good certainty of timely payment. Liquidity factors and
company fundamentals are sound and risk factors are small.
FITCH INVESTORS SERVICE, INC.
F-1+ is the highest category, and indicates the strongest degree of
assurance for timely payment. Issues rated F-1 reflect an assurance of timely
payment only slightly less than issues rated F-1+. Issues assigned an F-2
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues in the first two rating
categories.
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<PAGE> 53
COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS
AND DEPOSIT OBLIGATIONS ISSUED BY BANKS
THOMSON BANKWATCH (TBW)
TBW-1 is the highest category and indicates the degree of safety regarding
timely repayment of principal and interest is very high. TBW-2 is the second
highest category and while the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as high
as for issues rated "TBW-1."
53
<PAGE> 54
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
COMMON STOCK--99.6%
AEROSPACE/DEFENSE--2.0%
B.F. Goodrich Co. 12,400 $ 465
Boeing Co. 90,200 8,163
Coltec Industries, Inc.* 18,200 273
General Dynamics Corp. 14,900 955
Litton Industries, Inc.* 10,500 490
Lockheed Martin Corp. 53,292 4,483
McDonnell Douglas Corp. 60,000 3,008
Northrop Grumman Corp. 15,900 1,141
Raytheon Co. 60,400 3,111
Rockwell International Corp. 55,500 2,886
Sundstrand Corp. 14,600 546
Textron, Inc. 22,700 1,938
United Technologies Corp. 33,200 3,743
------
31,202
------
AIR TRANSPORTATION--0.5%
AMR Corp.* 25,100 2,058
America West Airlines, Inc. Class B* 11,000 147
Comair Holdings, Inc. 12,000 290
Continental Airlines, Inc. Class B* 14,400 326
Delta Airlines, Inc. 24,700 1,751
Northwest Airlines Corp. Class A* 24,500 923
Southwest Airlines Co. 36,400 833
UAL Corp.* 21,600 1,037
USAir Group, Inc.* 16,500 295
------
7,660
------
ALCOHOLIC BEVERAGES--0.4%
Anheuser-Busch Companies, Inc. 69,200 5,242
Brown Forman Corp. Class B 15,500 562
------
5,804
------
APPAREL--0.6%
Jones Apparel Group, Inc.* 6,800 377
Liz Claiborne, Inc. 17,500 608
NIKE, Inc. Class B 39,800 4,298
Nautica Enterprises, Inc.* 10,000 266
Nine West Group, Inc.* 7,700 397
Reebok International Ltd. 16,700 601
Russell Corp. 5,900 189
Springs Industries, Inc. 5,000 226
Talbots, Inc. 7,500 257
Unifi, Inc. 16,925 463
V.F. Corp. 18,800 1,105
Warnaco Group, Inc. Class A 13,600 337
------
9,124
------
</TABLE>
F-1
<PAGE> 55
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
AUTOMOTIVE PRODUCTS--0.2%
Bandag, Inc. 4,000 $ 189
Cooper Tire & Rubber 19,500 380
Danaher Corp. 12,800 531
Goodyear Tire & Rubber 38,900 1,775
Lear Corp.* 14,000 537
------
3,412
------
BANKS--7.8%
AmSouth Bancorp. 11,700 461
Banc One Corp. 116,021 4,452
Bancorp Hawaii, Inc. 10,175 385
Bank of Boston Corp. 42,120 2,222
Bank of New York Co., Inc. 101,000 2,815
BankAmerica Corp. 94,995 7,362
Bankers Trust New York Corp. 21,300 1,656
Barnett Banks, Inc. 23,088 1,515
Boatmens Bancshares, Inc. 38,700 2,063
Central Fidelity Banks, Inc. 12,825 304
Chase Manhattan Corp. (New) 114,330 8,503
Citicorp 131,100 10,914
Comerica, Inc. 29,264 1,427
Commerce Bancshares, Inc. 7,056 257
Compass Bancshares, Inc. 8,850 298
Corestates Financial Corp. 56,592 2,341
Crestar Financial Corp. 12,400 721
Dime Bancorp, Inc. (New)* 24,926 327
Fifth Third Bancorp 26,975 1,436
First American Corp. 5,900 274
First Bank System, Inc. 37,109 2,384
First Chicago NBD Corp. 81,521 3,475
First Commerce Corp. 10,562 380
First Empire State Corp. 2,500 636
First Security Corp. 19,612 533
First Tennessee National Corp. 16,300 559
First Union Corp. 77,793 4,969
First Virginia Banks, Inc. 9,750 405
First of America Bank Corp. 21,900 1,035
Firstar Corp. 19,500 921
Firstmerit Corp. 5,400 163
Fleet Financial Group, Inc. (New) 73,580 3,072
Hibernia Corp. Class A 35,000 385
Huntington Bancshares, Inc. 48,512 1,107
J.P. Morgan & Co., Inc. 51,400 4,504
Keycorp (New) 58,923 2,364
MBNA Corp. 59,700 1,813
Marshall & Ilsley Corp. 19,828 548
Mellon Bank Corp. 40,472 2,241
</TABLE>
F-2
<PAGE> 56
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Mercantile Bancorp, Inc. 14,450 $ 706
Mercantile Bankshares Corp. 10,450 280
National City Corp. 74,240 2,793
NationsBank Corp. 78,464 6,679
Northern Trust Corp. 16,950 1,116
Norwest Corp. 94,288 3,548
Old Kent Financial Corp. 17,120 688
PNC Bank Corp. 90,430 2,826
Provident Bancorp, Inc.* 6,800 272
Regions Financial Corp. 13,850 635
Republic New York Corp. 16,400 1,084
Signet Banking Corp. 15,300 369
SouthTrust Corp. 25,125 744
Southern National Corp. 28,750 898
Star Banc Corp. 7,100 559
State Street Boston Corp. 20,100 1,088
Summit Bancorp 32,900 1,275
Suntrust Banks, Inc. 57,200 2,195
Synovus Financial Corp. 25,650 612
U.S. Bancorp 47,891 1,838
Union Bank of California 7,400 357
Union Planters Corp. 12,100 398
Valley National Bancorp 11,365 293
Wachovia Corp. (New) 42,520 1,945
Wells Fargo & Co. 26,000 6,468
Wilmington Trust Co. 4,900 160
Zions Bancorp 2,900 251
-------
121,304
-------
BUSINESS MACHINES & SOFTWARE--7.5%
3COM Corp.* 43,400 2,029
Adobe Systems, Inc. 23,800 832
Amdahl Corporation* 32,100 319
America Online, Inc.* 21,100 640
Apple Computer, Inc. 38,700 941
Autodesk, Inc. 12,200 282
BMC Software, Inc.* 12,100 904
Bay Networks, Inc.* 53,923 1,483
Cabletron Systems, Inc.* 24,250 1,479
Ceridian Corp.* 17,480 745
Cirrus Logic, Inc.* 12,200 188
Cisco Systems, Inc.* 172,300 9,078
Compaq Computer Corp.* 70,600 3,998
Computer Assoc. International, Inc. 96,075 5,044
Computer Sciences Corp.* 20,498 1,435
Compuware Corp.* 11,000 476
Dell Computer Corp.* 27,300 1,831
Diebold, Inc. 17,212 884
</TABLE>
F-3
<PAGE> 57
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Digital Equipment Corp.* 38,400 $ 1,483
EMC Corp.* 55,900 1,076
Electronic Arts, Inc.* 11,400 353
Electronics for Imaging, Inc.* 7,500 471
Gateway 2000, Inc.* 24,000 1,074
Hewlett Packard Co. 267,400 11,699
Honeywell, Inc. 33,800 1,965
Informix Corp.* 40,700 918
International Business Machines 147,700 16,893
Intuit, Inc.* 11,800 435
Iomega Corp.* 39,000 602
Komag, Inc.* 27,200 573
McAfee Associates, Inc.* 8,000 479
Medic Computer Systems, Inc.* 6,500 227
Micron Electronics* 20,000 319
Microsoft Corp.* 158,300 19,402
Network General Corp.* 11,000 188
Novell, Inc.* 104,000 1,086
Oracle Systems Corp.* 170,275 5,992
Parametric Technology Corp.* 36,200 1,643
PeopleSoft, Inc.* 11,400 876
Pitney Bowes, Inc. 39,300 1,896
Policy Management Systems Corp.* 3,000 106
Safeguard Scientifics, Inc.* 7,000 226
Seagate Technology, Inc.* 26,830 1,288
Security Dynamics Technology* 4,000 264
Shiva Corp.* 8,400 424
Silicon Graphics, Inc.* 47,900 1,114
Sterling Software, Inc.* 7,200 489
Storage Technology Corp.* 14,800 561
Sun Microsystems, Inc.* 49,500 2,688
Sybase, Inc.* 15,120 243
Synopsys, Inc.* 9,800 373
Tandem Computers, Inc.* 47,800 502
Unisys Corp.* 69,900 411
Western Digital Corp.* 8,800 309
Xerox Corp. 89,500 4,911
-------
116,147
-------
BUSINESS SERVICES--3.1%
American Management Systems, Inc.* 11,000 279
Apria Healthcare Group, Inc.* 14,000 354
Automatic Data Processing, Inc. 78,200 3,255
Browning Ferris Industries Inc. 55,200 1,408
Cadence Design Systems, Inc.* 19,875 589
Cambridge Technology Partners* 12,000 342
Cintas Corp. 16,100 879
Comdisco, Inc. 22,022 573
</TABLE>
F-4
<PAGE> 58
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Concord EFS, Inc.* 14,850 $ 379
Corrections Corp. of America* 18,000 581
Credit Acceptance Corp.* 7,000 154
Deluxe Corp. 20,400 780
Dun & Bradstreet Corp. 47,600 2,743
Ecolab, Inc. 14,400 437
Equifax, Inc. 39,000 995
FHP International Corp.* 10,500 380
First Data Corp. 61,551 4,801
Fiserv, Inc.* 8,975 302
FlightSafety International, Inc. 9,800 434
Foundation Health Corp.* 12,200 366
GTECH Holdings Corp.* 15,700 436
Gartner Group Inc. Class A (New)* 24,300 759
H & R Block, Inc. 22,700 568
HBO & Co. 24,600 1,341
Health Care & Retirement Corp.* 10,050 249
Health Management Associates, Inc. Class A* 21,168 482
HealthCare Compare Corp.* 6,000 257
Healthsource, Inc.* 17,000 255
Interpublic Group of Companies, Inc. 19,900 900
Kelly Services, Inc. Class A 5,525 155
Laboratory Corp. of America Holdings, Inc.* 18,648 75
Manpower, Inc. 19,500 695
Medaphis Corp.* 25,200 321
Medpartners/Mullikin, Inc.* 13,000 270
National Service Industries, Inc. 12,200 464
Olsten Corp. 22,275 621
Omnicom Group, Inc. 19,100 867
OrNda Healthcorp* 16,300 420
PHH Corp. 9,000 260
PacifiCare Health Systems, Inc. Class B* 9,300 746
Paychex, Inc. 22,725 1,221
PhyCor Inc.* 12,300 401
Quorum Health Group, Inc.* 13,100 332
R.R. Donnelley & Sons Co. 37,500 1,223
Republic Industries, Inc.* 50,000 1,300
Reynolds & Reynolds Co. Class A 10,200 511
Robert Half International, Inc.* 23,100 762
SUPERVALU, Inc. 15,800 444
Safety-Kleen Corp. 8,600 148
Sanifill Inc. 6,500 301
Service Corp. International 33,700 1,900
Shared Medical Systems Corp. 7,600 414
Steris Corp.* 9,000 276
Stewart Enterprises, Inc. Class A 13,050 445
SunGard Data Systems, Inc.* 8,800 375
Total System Services, Inc. 31,800 719
</TABLE>
F-5
<PAGE> 59
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
U.S.A. Waste Services, Inc.* 30,500 $ 839
United Waste Systems, Inc.* 9,000 263
Value Health, Inc.* 9,082 144
Vencor Inc.* 15,775 495
Viad Corp. 20,100 286
WMX Technologies, Inc. 132,000 4,175
Wallace Computer Services, Inc. 6,800 184
Wellpoint Health Networks, Inc. Class A* 17,275 536
Wheelabrator Technologies, Inc. 37,300 555
------
48,421
------
CHEMICAL--3.4%
A. Schulman, Inc. 10,000 221
ARCO Chemical Co. 25,600 1,229
Air Products & Chemicals, Inc. 29,100 1,593
Albemarle Corp. 25,400 410
Betz Laboratories, Inc. 4,100 201
Cabot Corp. 17,800 490
Cytec Industries, Inc.* 13,755 478
Dow Chemical Co. 67,300 5,367
E.I. Du Pont de Nemours & Co. 147,500 12,113
Eastman Chemical Co. 23,725 1,326
Ethyl Corp. 31,300 282
Georgia Gulf Corp. 12,600 397
Great Lakes Chemical Corp. 14,500 834
Hercules, Inc. 29,300 1,458
International Speciality Products, Inc.* 15,400 169
Loctite Corp. 9,300 408
Lubrizol Corp. 15,600 443
Lyondell Petrochemical Co. 16,300 371
M.A. Hanna Co. 10,725 233
Minnesota Mining & Manufacturing Co. 113,700 7,817
Monsanto Co. 155,500 4,995
Morton International, Inc. 36,900 1,370
Nalco Chemical Co. 14,800 475
Olin Corp. 5,000 396
PPG Industries, Inc. 47,600 2,350
Praxair Inc. 47,100 1,937
RPM, Inc. 10,875 173
Rohm & Haas Co. 16,300 1,019
Sigma-Aldrich Corp. 17,500 925
Union Carbide Corp. 37,000 1,600
Valspar Corp. 2,800 132
W.R. Grace & Co. 24,900 1,634
Witco Corp. 12,900 390
------
53,236
------
</TABLE>
F-6
<PAGE> 60
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
CONSTRUCTION--0.4%
Armstrong World Industries, Inc. 8,100 $ 501
Clayton Homes, Inc. 21,077 424
Crane Co. 4,600 184
Fluor Corp. 20,300 1,299
Lafarge Corp. 16,100 306
Martin Marietta Materials, Inc. 21,400 471
Oakwood Homes Corp. 14,000 329
Owens Corning* 11,600 422
Schuller Corp. 49,300 487
Sherwin Williams Co. 27,500 1,203
Stanley Works 19,800 545
USG Corp.* 11,700 333
Vulcan Materials Co. 7,800 451
-----
6,955
-----
CONSUMER-DURABLE--0.4%
Black & Decker Corp. 19,500 770
Leggett & Platt, Inc. 18,300 522
Masco Corp. 40,400 1,177
Maytag Corp. 22,800 459
Newell Co. 37,674 1,173
Shaw Industries, Inc. 30,100 452
Snap-on Tools Corp. 10,100 461
Sunbeam Corporation 21,100 459
Whirlpool Corp. 21,100 1,034
-----
6,507
-----
CONSUMER-NONDURABLE--1.4%
American Greetings Corp. Class A 29,200 756
Apple South, Inc. 12,350 258
Applebee's International, Inc.* 5,000 145
Boston Chicken, Inc.* 15,600 541
Brinker International, Inc.* 20,225 303
Corning, Inc. 63,800 2,377
Cracker Barrel Old Country Store, Inc. 20,900 489
Darden Restaurants, Inc. 38,600 309
Duracell International, Inc. 29,500 1,331
First Brands Corp. 6,400 146
Hasbro, Inc. 23,150 851
Lancaster Colony Corp. 5,300 193
Lone Star Steakhouse & Saloon, Inc.* 7,400 246
Mattel, Inc. 72,220 1,905
McDonald's Corp. 184,600 8,561
Outback Steakhouse, Inc.* 11,250 316
Papa John's International, Inc.* 5,000 227
Premark International, Inc. 17,300 316
Rubbermaid, Inc. 36,000 954
</TABLE>
F-7
<PAGE> 61
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Starbucks Corp.* 20,500 $ 669
U S Industries Inc. New* 15,000 386
Wendy's International, Inc. 33,500 678
------
21,957
------
CONTAINERS--0.3%
Bemis Co., Inc. 13,400 400
Crown Cork & Seal, Inc. 32,700 1,529
Jefferson Smurfit Corp.* 25,900 311
Owens-Illinois, Inc.* 30,900 475
Sealed Air Corp.* 9,600 364
Sonoco Products Co. 21,310 631
Stone Container Corp. 22,112 307
------
4,017
------
ELECTRONICS--4.1%
ADC Telecommunications, Inc.* 17,700 1,007
AMP, Inc. 61,300 2,345
Adaptec, Inc.* 15,200 759
Advanced Micro Devices, Inc.* 44,900 572
Altera Corp.* 9,200 405
American Power Conversion Corp.* 14,000 193
Amphenol Corp. Class A* 6,500 128
Analog Devices, Inc.* 37,050 894
Applied Materials, Inc.* 49,700 1,205
Arrow Electronics, Inc.* 11,400 520
Ascend Communications, Inc.* 27,300 1,432
Atmel Corp.* 30,200 780
Avnet, Inc. 9,100 425
Cascade Communications Corp.* 25,300 1,722
Checkpoint Systems, Inc.* 8,000 231
Cypress Semiconductor Corp.* 15,600 181
EG&G, Inc. 7,200 135
Electronic Data Systems Corp. 130,000 7,085
FORE Systems, Inc.* 23,400 829
General Instrument Corp.* 37,000 1,013
General Signal Corp. 11,600 465
Glenayre Technologies, Inc.* 14,600 534
Harris Corp. 8,300 510
Imation Corp.* 10,760 254
Input/Output, Inc.* 11,400 403
Intel Corp. 217,300 17,343
KLA Instruments Corp.* 10,400 207
LSI Logic Corp.* 32,100 702
Linear Technology Corp. 18,700 626
Maxim Integrated Products, Inc.* 14,600 450
Mentor Graphics Corp.* 8,000 110
Micron Technology Inc. 49,200 1,119
Molex, Inc. 23,445 774
</TABLE>
F-8
<PAGE> 62
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Molex, Inc. Class A 12,366 $ 369
Motorola, Inc. 160,800 8,583
National Semiconductor Corp.* 33,300 612
Perkin-Elmer Corp. 10,300 534
Pittway Corp. Class A 6,750 317
QUALCOMM, Inc.* 14,700 637
SCI Systems, Inc.* 9,000 403
Scientific-Atlanta, Inc. 11,700 158
Sensormatic Electronics Corp. 27,150 499
Solectron Corp.* 14,100 527
Symbol Technologies, Inc.* 4,300 191
Tektronix, Inc. 7,600 295
Teradyne, Inc.* 17,900 277
Texas Instruments, Inc. 48,300 2,258
Thermo Instrument Systems, Inc.* 26,737 1,036
Thomas & Betts Corp. 10,400 382
Varian Associates, Inc. 9,300 424
VeriFone, Inc.* 6,500 310
Vicor Corp.* 12,500 309
Vishay Intertechnology, Inc.* 12,810 258
Xilinx, Inc.* 17,400 611
------
64,348
------
ENERGY-DEVELOPMENT--1.3%
Anadarko Petroleum Corp. 19,700 1,039
Apache Corp. 30,100 884
BJ Services Co.* 10,000 376
Baker Hughes, Inc. 41,200 1,246
Burlington Resources, Inc. 33,000 1,407
Chesapeake Energy Corp.* 7,500 403
Cooper Cameron Corp.* 7,500 396
Dresser Industries, Inc. 46,060 1,336
ENSCO International, Inc.* 16,400 480
Enron Oil & Gas Co. 41,100 1,063
Freeport-McMoRan, Inc. 4,250 146
Global Marine, Inc.* 51,500 740
Halliburton Co. 30,100 1,584
Louisiana Land & Exploration Co. 8,700 495
MAPCO Petroleum, Inc. 7,400 399
Mitchell Energy & Development Corp. Class A 8,000 150
NGC Corp. 31,000 469
Nabors Industries, Inc.* 21,100 314
Noble Affiliates, Inc. 12,400 498
Noble Drilling Corp.* 30,000 428
Occidental Petroleum Corp. 84,900 1,974
Parker & Parsley Petroleum Co.* 9,400 233
Reading & Bates Corp. (New)* 18,500 453
Rowan Cos., Inc. 22,000 338
</TABLE>
F-9
<PAGE> 63
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Sonat Offshore Drilling, Inc. 8,300 $ 453
Tidewater, Inc. 15,000 576
Union Texas Petroleum Holdings, Inc. 21,100 438
United Meridian Corp.* 7,500 298
Valero Energy Corp. 6,600 139
Vastar Resources 29,800 1,039
Weatherford Enterra, Inc.* 9,400 270
------
20,064
------
FOOD-AGRICULTURE--5.6%
Archer-Daniels-Midland Co. 142,443 2,528
CPC International, Inc. 38,000 2,617
Campbell Soup Co. 65,600 4,272
Coca-Cola Co. 658,600 32,930
Coca-Cola Enterprises, Inc. 34,200 1,381
ConAgra, Inc. 61,824 2,604
Dean Foods Co. 6,150 159
Dole Food Company, Inc. 13,100 542
Earthgrains Co. 2,388 81
Flowers Industries, Inc. 15,000 270
General Mills, Inc. 43,600 2,398
H.J. Heinz Co. 105,100 3,311
Hershey Foods Corp. 20,400 1,777
Hormel Foods Corp. 19,100 406
IBP, Inc. 20,400 477
IMC Global, Inc. 24,760 1,065
Interstate Bakeries Corp. (New)* 18,600 563
Kellogg Co. 58,400 3,942
McCormick & Co., Inc. 15,400 318
Nabisco Holdings Corp. Class A 14,000 471
Pepsico, Inc. 414,600 11,920
Pioneer HI Bred International, Inc. 19,400 1,069
Quaker Oats Co. 34,600 1,137
Ralston Purina Co. 26,300 1,644
Richfood Holdings, Inc. 8,500 321
Sara Lee Corp. 130,900 4,123
Sysco Corp. 46,700 1,500
Terra Industries, Inc. 11,100 147
Tyson Foods, Inc. Class A 46,200 1,123
Universal Corp. 9,500 240
Universal Foods Corp. 4,100 117
Whitman Corp. 23,900 535
Wm Wrigley Junior Co. 35,000 1,894
------
87,882
------
</TABLE>
F-10
<PAGE> 64
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
GOLD--0.2%
Homestake Mining Co. 37,800 $ 624
Newmont Gold Co. 28,600 1,541
Newmont Mining Corp. 26,132 1,382
Santa Fe Pacific Gold Corp. 25,720 334
------
3,881
------
HEALTHCARE--9.6%
ALZA Corp.* 27,600 756
Abbott Laboratories 210,200 9,485
Allergan, Inc. 15,700 610
American Home Products Corp. 170,100 10,078
Amgen, Inc.* 67,700 3,948
Bausch & Lomb Inc. 13,100 434
Baxter International, Inc. 74,600 3,329
Beckman Instruments, Inc. 4,300 159
Becton Dickinson & Co. 35,800 1,463
Bergen Brunswig Corp. Class A 6,483 181
Beverly Enterprises, Inc.* 18,400 189
Biogen, Inc.* 7,400 514
Biomet, Inc.* 25,900 403
Boston Scientific Corp.* 49,271 2,260
Bristol Myers Squibb Co. 131,900 11,574
C.R. Bard, Inc. 13,600 422
Cardinal Health, Inc. 19,662 1,443
Caremark International, Inc. 17,475 435
Centocor, Inc.* 20,600 695
Chiron Corp.* 49,612 967
Columbia/HCA Healthcare Corp. 122,172 6,887
Dentsply International, Inc. 4,100 168
Dura Pharmaceuticals, Inc.* 9,000 313
Eli Lilly & Co. 150,284 8,604
Forest Laboratories, Inc.* 9,300 382
Genentech Inc.* 34,300 1,801
Genesis Health Ventures, Inc.* 8,000 204
Genetics Institute* 6,300 393
Genzyme Corp. General Division* 12,000 289
Guidant Corp. 17,168 871
HealthSouth Rehabilitation Corp.* 41,600 1,347
Hillenbrand Industries, Inc. 15,000 486
Humana Inc.* 46,500 872
IDEXX Laboratories, Inc.* 9,800 383
IVAX Corp. 29,700 479
Interneuron Pharmaceuticals* 10,500 326
Johnson & Johnson 354,200 17,444
Lincare Holdings, Inc.* 7,500 279
Mallinckrodt Group, Inc. 25,600 1,037
Manor Care, Inc. 14,550 500
</TABLE>
F-11
<PAGE> 65
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
McKesson Corp. (New) 9,700 $ 413
Medtronic, Inc. 62,500 3,250
Merck & Co., Inc. 328,654 21,568
Mylan Laboratories, Inc. 25,550 418
Nellcor Puritan Bennett, Inc.* 15,000 388
Omnicare, Inc. 26,600 652
Pfizer, Inc. 168,000 11,928
Quintiles Transnational Corp.* 6,000 452
R.P. Scherer Corp.* 3,600 173
Rhone-Poulenc Rorer, Inc. 34,000 2,393
Schering Plough Corp. 98,600 5,509
St. Jude Medical, Inc.* 26,450 951
Stryker Corp. 21,600 531
Sybron International Corp.* 9,800 270
Tenet Healthcare Corp.* 55,368 1,163
Thermo Cardiosystems, Inc.* 7,500 256
Thermotrex Corp.* 5,000 188
United Healthcare Corp. 44,900 1,734
United States Surgical Corp. 15,300 558
Vivra, Inc.* 11,000 331
Warner Lambert Co. 71,400 4,248
Watson Pharmaceuticals, Inc.* 9,500 273
-------
150,057
-------
HOUSEHOLD PRODUCTS--2.1%
Alberto Culver Co. Class B Convertible 4,500 186
Avon Products, Inc. 35,200 1,685
Clorox Co. 13,300 1,245
Colgate-Palmolive Co. 41,500 3,372
Dial Corp. (New)* 20,100 231
Gillette Co. 116,500 7,427
International Flavors & Fragrances, Inc. 32,500 1,398
Procter & Gamble Co. 183,900 16,344
Tambrands, Inc. 8,900 378
Thermolase Corp.* 5,700 131
Tupperware Corp.* 17,300 757
-------
33,154
-------
IMAGING & PHOTO--0.5%
C-Cube Microsystems, Inc.* 8,000 306
Eastman Kodak Co. 93,900 6,808
Polaroid Corp. 10,700 453
-------
7,567
-------
INSURANCE--4.1%
AFLAC, Inc. 39,825 1,369
AMBAC, Inc. 9,300 506
Aetna, Inc. 47,565 3,145
Alleghany Corp.* 2,896 585
</TABLE>
F-12
<PAGE> 66
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Allmerica Property & Casualty Companies, Inc. 10,700 $ 302
Allstate Corp. 119,124 5,316
American General Corp. 54,500 1,989
American International Group, Inc. 127,225 12,086
American National Insurance Co. 5,700 392
American Re Corp. 11,300 713
Aon Corp. 27,350 1,381
Bankers Life Holdings Corp. 6,900 169
CNA Financial Corp.* 18,400 1,849
Chubb Corp. 55,100 2,445
Cigna Corp. 20,700 2,404
Cincinnati Financial Corp. 14,238 778
Conseco, Inc. 8,000 336
Equitable Companies, Inc. 45,100 1,111
Equitable of Iowa Companies 4,700 173
First Colony Corp. 14,450 508
General Re Corp. 20,700 2,999
Hartford Steam Boiler Inspection & Ins., Co. 2,700 120
Health Systems International, Inc.* 10,400 254
ITT Hartford Group, Inc. 28,900 1,524
Jefferson-Pilot Corp. 19,850 1,020
Liberty Financial Cos. 7,000 214
Lincoln National Corp., Inc. 25,100 1,111
MBIA Corp. 13,500 1,100
MGIC Investment Corp. 17,700 1,122
Marsh & McLennan Companies 21,400 1,990
Mercury General Corp. 4,200 190
Ohio Casualty Corp. 5,300 170
Old Republic International Corp. 17,850 397
Oxford Health Plans, Inc.* 21,900 999
Paul Revere Corp. 6,900 196
Progressive Corp. 16,400 892
Protective Life Corp. 13,800 486
Provident Companies, Inc. 12,000 444
Providian Corp. 25,400 1,051
Reliastar Financial Corp. 12,500 552
Safeco Corp. 39,600 1,317
St. Paul Companies, Inc. 22,300 1,154
Sunamerica, Inc. 17,050 1,162
TIG Holdings, Inc. 16,300 469
The PMI Group, Inc.* 10,000 489
Torchmark Corp. 15,650 665
Transamerica Corp. 20,500 1,397
Transatlantic Holdings, Inc. 5,800 402
UNUM Corp. 19,808 1,258
USF&G Corp. 32,700 527
USLIFE Corp. 5,400 158
United Companies Financial Corp. 7,000 266
</TABLE>
F-13
<PAGE> 67
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
United Insurance Companies, Inc.* 12,000 $ 280
Unitrin, Inc. 7,200 363
Western National Corp. 9,500 179
------
64,474
------
MEDIA--2.5%
A.H. Belo Corp. Class A 18,000 722
BHC Communications, Inc. Class A* 5,700 530
Chris-Craft Industries, Inc.* 4,555 184
Clear Channel Communications* 9,600 791
Comcast Corp. Class A 69,400 1,123
Cox Communications, Inc. Class A* 67,306 1,329
Dow Jones & Co., Inc. 22,000 861
E.W. Scripps Co. Class A 19,675 876
Gannett, Inc. 39,800 2,667
Harte Hanks Communications (New) 9,100 232
Infinity Broadcasting Corp. Class A* 20,587 564
King World Productions, Inc.* 9,000 317
Knight-Ridder, Inc. 28,800 972
Lee Enterprises, Inc. 7,000 144
Lin Television Corp.* 10,550 378
Marvel Entertainment Group, Inc.* 14,500 125
McGraw-Hill, Inc. 24,100 988
Media General, Inc. Class A 7,000 218
Meredith Corp. 8,000 344
New York Times Co. Class A 21,313 666
Pulitzer Publishing Co.* 2,300 125
Reader's Digest Assoc., Inc. Class A 28,800 1,163
Regal Cinemas, Inc.* 5,000 184
Renaissance Communications Corp.* 7,000 247
SBC Communications, Inc. 160,128 7,466
Scholastic Corp.* 2,800 190
Tele Communications, Inc. (New)--TCI Group Series A* 187,346 2,775
Tele-Communications, Inc. (Liberty Media Group)
Class A* 38,086 1,009
Time Warner Inc. 108,480 3,621
Times Mirror Co. (New) Series A 26,400 1,145
Tribune Co. (New) 15,600 1,121
Turner Broadcasting System, Inc. Class A 17,200 428
Turner Broadcasting System, Inc. Class B 54,100 1,339
United Television, Inc. 3,000 284
Viacom Inc. Class A* 18,212 569
Viacom Inc. Class B* 95,074 2,995
Washington Post Co. Class B 2,500 808
------
39,500
------
MISCELLANEOUS FINANCE--4.1%
A.G. Edwards & Sons, Inc. 15,562 436
ADVANTA Corp. Class A 14,600 714
AT&T Capital Corp. 10,900 486
</TABLE>
F-14
<PAGE> 68
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
American Express Co. 132,900 $ 5,814
Bear Stearns Companies, Inc. 37,275 871
Beneficial Corp. 13,000 733
Berkshire Hathaway, Inc.* 325 10,173
Capital One Financial Corp. 17,000 512
Charter One Financial, Inc. 12,500 476
Countrywide Credit Industries, Inc. 25,985 627
Dean Witter Discover & Co. 43,995 2,200
Federal Home Loan Mortgage Corp. 49,600 4,383
Federal National Mortgage Assoc. 296,800 9,201
Finova Group, Inc. 10,800 594
First USA, Inc. 18,200 965
Franklin Resources, Inc. 22,200 1,321
GATX Corp. 5,000 231
Golden West Financial Corp. 19,200 1,066
Great Western Financial Corp. 30,800 762
Green Tree Financial Corp. 33,000 1,147
Greenpoint Financial Corp. 13,000 463
H.F. Ahmanson & Co. 24,800 626
Household International, Inc. 25,300 2,005
Lehman Brothers Holdings, Inc. 22,880 483
Leucadia National Corp. 13,000 296
Mercury Finance Co. 35,563 413
Merrill Lynch & Co., Inc. 45,300 2,775
Money Store Inc. 15,000 364
Morgan Stanley Group, Inc. 45,100 2,154
Paine Webber Group, Inc. 25,125 518
Salomon Inc. 27,100 1,220
Standard Federal Bank 10,700 448
Student Loan Marketing Assoc. 15,100 1,112
T. Rowe Price Associates, Inc. 13,200 384
TCF Financial Corp. 12,800 478
Travelers Group, Inc. 123,325 5,349
United Asset Management Corp. 18,400 426
Washington Mutual, Inc. 24,125 875
Wesco Financial Corp. 2,100 365
------
63,466
------
MOTOR VEHICLE--2.3%
Chrysler Corp. 204,600 5,959
Cummins Engine, Inc. 10,400 391
Dana Corp. 22,300 669
Eaton Corp. 17,900 991
Echlin Inc. 13,800 421
Fleetwood Enterprises, Inc. 19,200 533
Ford Motor Co. 317,700 10,643
General Motors Corp. 203,000 10,099
General Motors Corp. Class H 28,000 1,565
</TABLE>
F-15
<PAGE> 69
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Genuine Parts Co. 29,450 $ 1,263
Harley-Davidson, Inc. 20,700 849
PACCAR, Inc. 7,660 349
TRW, Inc. 17,600 1,628
------
35,360
------
NON-FERROUS--0.6%
Alumax, Inc.* 12,500 413
Aluminum Company of America 51,000 3,168
Asarco, Inc. 10,800 279
Cyprus Amax Minerals Co. 18,300 389
Engelhard Corp. 32,687 666
Freeport-McMoRan Copper & Gold, Inc. Class A 29,531 831
Freeport-McMoRan Copper & Gold, Inc. Class B 49,894 1,466
Phelps Dodge Corp. 15,400 932
Reynolds Metals Co. 14,800 792
------
8,936
------
OIL-DOMESTIC--1.2%
Amerada Hess Corp. 24,500 1,246
Ashland, Inc. 18,600 691
Atlantic Richfield Co. 46,100 5,382
FINA, Inc. Class A 8,000 403
Kerr-McGee Corp. 17,000 975
Murphy Oil Corp. 11,370 497
Oryx Energy Co.* 28,200 494
Pennzoil Co. 11,000 587
Phillips Petroleum Co. 72,700 2,944
Pogo Producing Co. 10,000 341
Santa Fe Energy Resources, Inc.* 13,600 160
Smith International, Inc. 10,000 348
Sun, Inc. 15,900 376
Tosco Corp. 9,300 446
USX Corp. (Marathon Group) (New) 81,000 1,691
Ultramar Corp. 11,800 325
Unocal Corp. 71,534 2,450
------
19,356
------
OIL-INTERNATIONAL--4.2%
Amoco Corp. 131,700 9,087
Chevron Corp. 176,800 10,409
Exxon Corp. 329,500 26,813
Mobil Corp. 106,500 12,008
Texaco, Inc. 71,300 6,328
Western Atlas, Inc.* 12,600 765
------
65,410
------
PAPER--1.6%
Alco Standard Corp. 32,300 1,409
Boise Cascade Corp. 10,000 338
</TABLE>
F-16
<PAGE> 70
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Bowater, Inc. 7,600 $ 274
Champion International Corp. 27,500 1,183
Consolidated Papers, Inc. 9,100 469
Fort Howard Corp.* 20,000 474
Georgia Pacific Corp. 24,300 1,807
International Paper Co. 85,100 3,404
James River Corp. 20,600 536
Kimberly Clark Corp. 75,330 5,904
Louisiana Pacific Corp. 24,000 522
Mead Corp. 11,500 658
Potlatch Corp. 4,300 162
Rayonier, Inc. 13,875 550
St. Joe Corp. 6,800 418
Temple-Inland, Inc. 19,400 958
Thermo Fibertek, Inc.* 9,150 118
Union Camp Corp. 16,300 791
Westvaco Corp. 28,300 810
Weyerhaeuser Co. 52,400 2,338
Willamette Industries, Inc. 17,000 1,056
------
24,179
------
PRODUCER GOODS-MANUFACTURING--5.4%
AGCO Corp. 19,600 463
Airgas, Inc.* 20,600 464
Allied Signal, Inc. 76,900 4,749
American Financial Group, Inc. 24,100 750
American Standard Co.* 20,000 683
Avery Dennison Corp. 11,400 583
Blyth Industries, Inc.* 10,000 460
Boise Cascade Office Products Corp.* 16,400 344
Briggs & Stratton Corp. 4,300 187
Case Corp. 23,900 1,087
Caterpillar, Inc. 54,400 3,747
Cincinnati Milacron, Inc. 5,100 101
Cooper Industries, Inc. 30,300 1,227
Corporate Express, Inc.* 22,900 862
Deere & Co. 71,500 2,842
Dover Corp. 34,600 1,518
Emerson Electric Co. 59,100 4,950
FMC Corp. (New)* 13,600 870
Federal Signal Corp. 10,066 228
Foster Wheeler Corp. 9,800 423
General Electric Co. 440,100 36,583
Harnischfeger Industries Corp. 10,100 381
Harsco Corp. 6,700 408
Hubbell, Inc. Class B 15,938 576
ITT Industries, Inc. 31,600 723
Illinois Tool Works, Inc. 29,600 2,046
</TABLE>
F-17
<PAGE> 71
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Ingersoll Rand Co. 33,700 $ 1,441
JLG Industries, Inc. 11,000 212
Johnson Controls, Inc. 8,800 620
Mark IV Industries, Inc. 14,672 315
Millipore Corp. 12,400 474
Nordson Corp. 2,700 139
Pall Corp. 24,533 577
Parker Hannifin Corp. 24,250 946
Pentair, Inc. 6,200 169
Presstek, Inc.* 4,000 252
Raychem Corp. 9,700 666
TRINOVA Corp. 7,000 220
Tecumseh Products Co. Class A 3,500 184
Tenneco, Inc. 43,000 2,139
Thermo Electron Corp. 39,137 1,551
Timken Co. 7,800 296
Trinity Industries, Inc. 11,950 387
Tyco Interest Ltd 37,614 1,589
U.S. Filter Corp. (New)* 10,000 261
Varity Corp.* 15,100 759
W.W. Grainger, Inc. 14,000 945
Westinghouse Electric Corp. 109,600 1,795
York International Corp. 8,400 379
------
83,571
------
RAILROAD--1.1%
Alexander & Baldwin, Inc. 6,700 173
Burlington Northern Santa Fe 39,951 3,196
CSX Corp. 54,700 2,769
Conrail Inc. 21,600 1,472
Illinois Central Corp. Class A 15,525 470
Kansas City Southern Industries, Inc. 14,700 595
Norfolk Southern Corp. 34,200 2,851
Southern Pacific Rail Corp.* 39,363 1,122
Union Pacific Corp. 52,900 3,855
Wisconsin Central Transportation Corp.* 12,900 453
------
16,956
------
REAL PROPERTY--0.2%
HFS, Inc.* 34,600 2,072
Host Marriott Corp.* 67,500 928
Rouse Co. 11,500 298
------
3,298
------
RETAIL--5.6%
Albertson's, Inc. 72,100 3,055
American Stores Co. (New) 36,700 1,509
AutoZone, Inc.* 38,500 1,049
Barnes & Noble, Inc.* 5,100 168
</TABLE>
F-18
<PAGE> 72
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Bed Bath & Beyond, Inc.* 24,800 $ 563
Best Buy Co., Inc.* 11,000 242
CDW Computer Centers, Inc.* 5,000 327
CUC International, Inc.* 63,625 2,187
Circuit City Stores, Inc. 25,700 810
CompUSA, Inc.* 13,000 522
Consolidated Stores Corp.* 19,400 737
Dayton Hudson Corp. 58,500 2,018
Dillard Department Stores, Inc. Class A 32,200 1,095
Dollar General Corp. 22,360 721
Family Dollar Stores, Inc. 14,000 238
Fastenal Co. 9,700 455
Federated Department Stores, Inc.* 51,200 1,773
Food Lion, Inc. Class A 150,450 1,302
Food Lion, Inc. Class B 64,800 527
Fruit of the Loom, Inc. Class A* 18,800 522
Gap Inc. 79,000 2,765
General Nutrition Companies, Inc.* 23,600 350
Giant Food Inc. Class A 13,700 461
Global Directmail Corp.* 10,000 453
Great Atlantic & Pacific Tea Co., Inc. 5,700 152
Hannaford Bros. Co., Inc. 13,300 446
Harcourt General, Inc. 20,200 967
Heilig-Meyers Co. 7,350 130
Home Depot, Inc. 124,866 6,634
Home Shopping Network, Inc.* 23,000 247
J.C. Penney, Inc. 62,300 3,294
Jack Eckerd Corp.* 17,400 426
Just for Feet, Inc.* 5,000 223
K Mart Corp. 135,700 1,357
Kohl's Corp.* 18,200 692
Kroger Co.* 31,200 1,322
Limited, Inc. 66,119 1,223
Lowes Cos, Inc. 42,100 1,521
May Department Stores Co. 75,900 3,453
Melville Corp. 31,300 1,322
Mercantile Stores Co., Inc. 8,300 438
Neiman Marcus Group Inc.* 11,800 350
Nordstrom, Inc. 22,900 893
Office Depot, Inc.* 37,300 592
OfficeMax, Inc.* 26,100 365
Payless Shoesource, Inc.* 9,600 337
Pep Boys--Manny, Moe & Jack 13,700 459
Petsmart Inc.* 27,400 750
Price Costco, Inc.* 47,704 951
Revco D.S., Inc.* 16,000 412
Rite Aid Corp. 17,900 571
Safeway, Inc.* 55,800 2,023
</TABLE>
F-19
<PAGE> 73
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Sears Roebuck & Co. 111,400 $ 4,902
Southland Corp.* 70,000 221
Spiegel, Inc. Class A (Non Voting) 28,000 233
Staples, Inc.* 38,605 765
Sunglass Hut International Inc.* 14,000 221
TJX Companies, Inc. 26,100 835
Tandy Corp. 18,058 797
Thrifty Payless* 15,000 242
Tiffany & Co. (New) 10,000 349
Toys 'R' Us, Inc.* 70,280 2,073
Viking Office Products, Inc.* 30,200 781
Vons Companies, Inc.* 11,700 518
Wal-Mart Stores, Inc. 605,900 16,056
Walgreen Co. 68,700 2,267
Weis Markets, Inc. 7,900 270
Winn Dixie Stores Inc. 38,300 1,317
Woolworth Corp.* 29,800 633
------
87,879
------
STEEL--0.3%
AK Steel Holding Corp. 7,500 279
Allegheny Teldyne Inc. 58,280 1,180
Bethlehem Steel Corp.* 28,600 293
Inland Steel Industries, Inc. 8,600 148
LTV Corp. 19,200 226
Nucor Corp. 26,100 1,220
USX Corp. (U.S. Steel Group) 19,160 527
Worthington Industries Inc. 16,700 339
------
4,212
------
TELEPHONE--6.7%
360 Communications Co.* 26,944 643
AT&T Corp. 429,817 22,565
Adtran, Inc.* 9,600 608
Airtouch Communications Inc.* 131,000 3,603
Alltel Corp. 46,400 1,311
Ameritech Corp. (New) 144,700 7,470
Andrew Corp.* 17,075 764
Aspect Telecommunications Corp.* 5,000 259
Bell Atlantic Corp. 115,726 6,510
BellSouth Corp. 267,400 9,693
Century Telephone Enterprises, Inc. 13,750 466
Cincinnati Bell Inc. 15,400 735
Comsat Corp. Series 1 17,000 385
DSC Communications Corp.* 35,900 1,066
Frontier Corp. 42,200 1,245
GTE Corp. 259,700 10,226
LCI International Inc.* 17,000 601
MCI Communications Corp. 178,100 4,486
</TABLE>
F-20
<PAGE> 74
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
MFS Communications Co., Inc.* 60,355 $ 2,554
Nextel Communications, Inc.* 66,000 1,085
Nynex Corp. 118,200 5,097
Octel Communications Corp.* 8,200 239
Pacific Telesis Group 112,700 3,649
Paging Network, Inc.* 30,300 540
Pairgain Technologies, Inc.* 12,000 800
PictureTel Corp. (New)* 4,800 157
Southern New England Telecommunications 13,800 526
Sprint Corp. 118,134 4,799
Telephone & Data Systems, Inc. 12,600 537
Tellabs, Inc.* 21,800 1,382
U S WEST, Inc. (Communications Group) 129,510 3,821
U S WEST, Inc. (Media Group)* 124,700 2,260
U.S. Robotics, Inc. 21,800 1,150
United States Cellular Corp.* 19,500 590
Worldcom, Inc.* 97,234 2,036
-------
103,858
-------
TOBACCO--1.8%
American Brands, Inc. 51,300 2,084
Loew's Corp. 33,500 2,504
Philip Morris Companies, Inc. 222,300 19,951
RJR Nabisco Holdings Corp. 67,536 1,781
UST, Inc. 54,200 1,626
-------
27,946
-------
TRANSPORTATION-MISCELLANEOUS--0.2%
Amerco, Inc.* 8,900 273
Caliber Systems, Inc. 10,000 174
Consolidated Freightways Inc. 7,900 182
Federal Express Corp.* 17,800 1,333
Fritz Companies, Inc.* 10,000 149
Pittston Services Group 9,900 280
Ryder System, Inc. 19,800 562
-------
2,953
-------
TRAVEL & RECREATION--1.4%
Bally Entertainment Corp.* 13,000 354
Brunswick Corp. 28,900 611
Callaway Golf Co. 19,000 627
Circus Circus Enterprises, Inc.* 25,400 864
Coleman Co., Inc. (New)* 7,200 122
Gaylord Entertainment Co. Class A 20,359 499
Grand Casinos, Inc.* 11,100 201
Harrahs Entertainment, Inc.* 25,100 477
Hilton Hotels Corp. 11,500 1,229
ITT Corp. (New)* 28,900 1,539
International Game Technology 33,600 685
</TABLE>
F-21
<PAGE> 75
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
La Quinta Inns, Inc. 19,200 $ 367
MGM Grand, Inc.* 13,500 510
Marriot International, Inc. 38,100 2,091
Mirage Resorts, Inc.* 49,100 1,142
Polaris Industries, Inc.* 7,000 201
Promus Hotel Corp.* 15,200 458
Walt Disney Co. 179,507 10,232
------
22,209
------
UTILITIES--4.9%
AES Corp.* 16,559 586
AGL Resources, Inc. 14,600 296
Allegheny Power System, Inc. 28,100 832
American Electric Power Co., Inc. 48,900 2,029
American Water Works Co., Inc. 19,600 419
Atlantic Energy, Inc. 7,800 138
Baltimore Gas & Electric Co. 47,150 1,226
Boston Edison Co. 12,900 298
Brooklyn Union Gas Co. 7,350 199
CIPSCO, Inc. 5,000 178
CMS Energy Corp. 27,900 834
Calenergy Co.,Inc.* 14,600 442
Carolina Power & Light Co. 38,500 1,343
Centerior Energy Corp. 23,600 180
Central & South West Corp. 55,800 1,472
Cinergy Corp. 49,565 1,487
Citizens Utilities Co. Class A* 53,909 633
Citizens Utilities Co. Class B* 8,241 97
Coastal Corp. 26,300 1,042
Columbia Gas System, Inc. 19,100 1,074
Consolidated Edison Co. 69,700 1,821
Consolidated Natural Gas Co. 22,600 1,229
DPL Inc. 21,850 516
DQE, Inc. 17,050 473
DTE Energy Co. 37,100 1,057
Delmarva Power & Light Co. 15,700 322
Dominion Resources, Inc. 45,150 1,687
Duke Power Co. 59,800 2,796
ENSERCH Corp. 24,500 493
Edison International 125,600 2,182
El Paso Natural Gas Co. 14,941 622
Enova Corp. 24,300 556
Enron Corp. 79,600 3,194
Entergy Corp. 59,421 1,508
Equitable Resources, Inc. 5,100 146
FPL Group, Inc. 48,200 2,133
Florida Progress Corp. 30,400 1,053
GPU, Inc. 28,100 885
</TABLE>
F-22
<PAGE> 76
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Hawaiian Electric Industries, Inc. 7,900 $ 276
Houston Industries, Inc. 69,900 1,520
IPALCO Enterprises, Inc. 15,000 405
Idaho Power Co. 5,400 178
Illinova Corp. 16,300 426
K N Energy, Inc. 7,000 241
KU Energy Corp. 5,500 163
Kansas City Power & Light Co. 15,900 437
LG&E Energy Corp. 25,900 589
Long Island Lighting Co. 24,300 419
MCN Corp. 17,600 471
Midamerican Energy Co. 34,461 547
Montana Power Co. 7,900 171
NICOR, Inc. 10,300 323
NIPSCO Industries, Inc. 13,900 514
National Fuel Gas Co. 5,800 215
Nevada Power Co. 13,000 268
New England Electric Co. 13,800 450
New York State Electric & Gas Corp. 16,400 353
Niagara Mohawk Power Corp. 25,200 208
NorAm Energy Co. 25,215 369
Northeast Utilities 25,900 330
Northern States Power Co. 15,200 694
Ohio Edison Co. 34,000 714
Oklahoma Gas & Electric Co. 10,200 413
P P & L Resources, Inc. 39,720 894
Pacific Enterprises 18,300 547
Pacific Gas & Electric Co. 105,300 2,382
Pacificorp 73,500 1,479
Panenergy Corp. 36,800 1,219
Peco Energy Co. 60,500 1,422
Peoples Energy Corp. 9,500 323
Pinnacle West Capital Corp. 19,300 555
Portland General Corp. 13,200 479
Potomac Electric Power Co. 39,500 973
Public Service Co. of Colorado 14,300 509
Public Service Enterprise Group 73,000 1,980
Puget Sound Power & Light Co. 16,200 371
Questar Corp. 17,900 649
SCANA Corp. 25,800 703
Sonat, Inc. 22,500 993
Southern Co. 179,700 4,066
Southwestern Public Service Co. 12,000 393
Teco Energy Inc. 27,200 649
Texas Utilities Co. 63,200 2,591
Unicom Corp. 52,900 1,217
Union Electric Co. 28,400 1,061
UtiliCorp United, Inc. 13,900 401
</TABLE>
F-23
<PAGE> 77
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
WPL Holdings, Inc. 4,400 $ 134
Washington Gas Light Co. 6,200 136
Washington Water Power Co. 7,700 142
Western Resources, Inc. 14,231 418
Williams Cos., Inc. 30,060 1,499
Wisconsin Energy Corp. 26,000 694
---------
77,051
---------
TOTAL COMMON STOCK
(Cost $1,209,274) 1,553,313
---------
PREFERRED STOCK--0.0%
Aetna, Inc. 6.25% Class C (Voting) 2,922 203
Airtouch Communications, Inc. 6.00% Class B
(Convertible) 4,243 122
Airtouch Communications, Inc. 4.25% Class C
(Convertible) 2,725 130
---------
TOTAL PREFERRED STOCK
(Cost $448) 455
---------
WARRANTS--0.0%
UTILITIES--0.0%
AES Corp. (Exp 7/31/00)* 25 0
---------
TOTAL WARRANTS
(Cost $0) 0
---------
</TABLE>
F-24
<PAGE> 78
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maturity Value
(000s) (000s)
--------- ----------
<S> <C> <C>
REPURCHASE AGREEMENT--0.3%
PNC Bank, N.A. 4.50%, Dated 08/30/96;
Due 09/03/96; Collateralized By:
Federal Home Loan Mortgage Corporation:
$8,230,000 Par; 6.50%, Due 10/15/08 $5,435 $ 5,432
---------
TOTAL REPURCHASE AGREEMENT
(Cost $5,432) 5,432
---------
TOTAL INVESTMENTS--99.9%
(Cost $1,215,154) 1,559,200
---------
OTHER ASSETS AND LIABILITIES--0.1%
Other Assets 5,536
Liabilities (4,677)
---------
859
---------
NET ASSETS--100.0%
Applicable to 86,013,083 outstanding shares,
$0.00001 par value (unlimited shares authorized) $1,560,059
==========
NET ASSET VALUE PER SHARE $18.14
=====
</TABLE>
- ---------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
F-25
<PAGE> 79
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<S> <C>
Investment income:
Dividends $ 26,356
Interest 365
------
Total investment income 26,721
------
Expenses:
Investment advisory and administration fee 3,133
Transfer agency and shareholder service fees 3,106
Custodian fees 234
Registration fees 255
Professional fees 94
Shareholder reports 191
Trustees' fees 40
Amortization of deferred organization costs 28
Insurance and other expenses 42
------
7,123
Less expenses reduced (1,036)
------
Total expenses incurred by Fund 6,087
------
Net investment income 20,634
------
Net realized gain (loss) on investments sold:
Proceeds from sales of investments 25,680
Cost of investments sold (24,251)
------
Net realized gain on investments sold 1,429
------
Change in net unrealized gain (loss) on investments:
Beginning of period 199,094
End of period 344,046
-------
Increase in net unrealized gain on investments 144,952
-------
Net gain on investments 146,381
-------
Increase in net assets resulting from operations $167,015
=======
</TABLE>
See accompanying Notes to Financial Statements.
F-26
<PAGE> 80
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Year ended
August 31,
1996 1995
---------- --------
<S> <C> <C>
Operations:
Net investment income $ 20,634 $ 12,704
Net realized gain on investments sold 1,429 430
Increase in net unrealized gain
on investments 144,952 115,945
---------- --------
Increase in net assets resulting
from operations 167,015 129,079
---------- --------
Dividends to shareholders from net investment
income (14,179) (6,199)
---------- --------
Capital share transactions:
Proceeds from shares sold 788,862 264,444
Net asset value of shares issued in
reinvestment of dividends 12,770 5,550
Early withdrawal fees 385 93
Less payments for shares redeemed (221,508) (120,314)
---------- --------
Increase in net assets from
capital share transactions 580,509 149,773
---------- --------
Total increase in net assets 733,345 272,653
Net assets:
Beginning of period 826,714 554,061
---------- --------
End of period (including undistributed
net investment income of $15,134 and
$8,679, respectively) $1,560,059 $826,714
========== ========
Number of Fund shares:
Sold 45,105 18,751
Reinvested 758 439
Redeemed (12,583) (8,825)
---------- --------
Net increase in shares outstanding 33,280 10,365
Shares outstanding:
Beginning of period 52,733 42,368
---------- --------
End of period 86,013 52,733
========== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-27
<PAGE> 81
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUND
The Schwab 1000 Fund (the "Fund") is a 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 Fund, the Trust also offers -- the Schwab Short/Intermediate
Government Bond Fund, Schwab Long-Term Government Bond Fund, 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 Fund is to provide a total return which matches
that of the Schwab 1000 Index(R), an index created to represent the performance
of the 1000 largest publicly traded common stocks of United States companies.
2. SIGNIFICANT ACCOUNTING POLICIES
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 -- Investments in securities traded on an exchange are valued
at the last sale price for a given day, or if a sale is not reported for that
day, at the mean between the most recent quoted bid and asked prices. Unlisted
securities for which market quotations are readily available are valued at the
mean between the most recent bid and asked prices. Securities for which no
quotations are readily available are valued at fair value as determined by the
Fund's investment manager pursuant to guidelines adopted in good faith by the
Board of Trustees. Short-term securities with 60 days or less to maturity are
stated at amortized cost, which approximates market value.
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<PAGE> 82
- ------------------------------------------------------------------------------
Security transactions and investment income -- Security transactions are
accounted for on a trade date basis (date the order to buy or sell is executed).
Dividend income and distributions to shareholders are recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Realized
gains and losses from security transactions are determined on an identified cost
basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states have been amortized on a
straight-line basis over the five-year period from the Fund's commencement of
operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all net investment income and realized net capital gains, if any, to
shareholders. Therefore, no federal income tax provision is required. The Fund
is considered a separate entity for tax purposes.
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized gain aggregated (in thousands) $344,046 of which $363,099 related
to appreciated securities and $19,053 related to depreciated securities.
F-29
<PAGE> 83
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of 0.30% of the first $500 million
of average daily net assets and 0.22% of such assets over $500 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$3,133,000 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 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 Fund incurred transfer agency and shareholder service
fees of $3,106,000, before Schwab reduced its fees (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 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 Fund incurred fees of $40,000 related to
the Trust's unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the Fund's ratio of operating expenses to average net assets. For the year
ended August 31, 1996, the total of such fees reduced by the Investment Manager
and Schwab was $648,000 and $388,000, respectively (see Note 9).
5. BORROWING AGREEMENT
The Trust has an arrangement with PNC Bank, N.A., the Fund's custodian, whereby
the Fund may borrow up to $50,000,000, on a
F-30
<PAGE> 84
- ------------------------------------------------------------------------------
temporary basis, to fund redemptions. Amounts borrowed under this arrangement
bear interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the year ended August 31, 1996, no borrowings were
made under this arrangement.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated (in thousands) $621,392 and $25,680, respectively, during the year
ended August 31, 1996.
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a 0.50% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended August 31, 1996, total early withdrawal fees
retained by the Fund amounted to $385,000.
8. COMPOSITION OF NET ASSETS
At August 31, 1996, net assets consisted of (in thousands):
<TABLE>
<S> <C>
Paid in capital $1,202,438
Accumulated undistributed net investment income 15,134
Accumulated net realized loss on investments sold (1,559)
Net unrealized gain on investments 344,046
----------
Total $1,560,059
==========
</TABLE>
At August 31, 1996, the Fund's Statement of Net Assets included: $714,000
payable for Fund shares redeemed, $98,000 payable for investment advisory and
administration fee, $103,000 payable for transfer agency and shareholder service
fees and $1,967,000 receivable for Fund shares sold.
F-31
<PAGE> 85
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
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 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26 $ 10.00
Income from investment
- ----------------------
operations
----------
Net investment income 0.24 0.26 0.26 0.17 0.24 0.15
Net realized and unrealized
gain (loss) on
investments 2.45 2.48 0.28 0.79 0.71 1.26
--------- -------- -------- -------- -------- --------
Total from investment
operations 2.69 2.74 0.54 0.96 0.95 1.41
Less distributions
- ------------------
Dividends from net
investment income (0.23) (0.14) (0.26) (0.12) (0.25) (0.15)
Distributions from realized
gain on investments -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Total distributions (0.23) (0.14) (0.26) (0.12) (0.25) (0.15)
--------- -------- -------- -------- -------- --------
Net asset value at
end of period $ 18.14 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26
========= ======== ======== ======== ======== ========
Total return (%) 17.27 21.23 4.28 8.06 8.52 14.25
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of
period (000s) $1,560,059 $826,714 $554,061 $515,272 $370,980 $192,206
Ratio of expenses to
average net assets (%) 0.49 0.54 0.51 0.45* 0.35 0.00*
Ratio of net investment
income to average net
assets (%) 1.66 2.03 2.06 2.21* 2.45 3.21*
Portfolio turnover rate (%) 2 2 3 1 1 1
Average commission rate $ 0.03
- ---------------
Ratio of expenses to
average net assets prior
to reduced fees and
absorbed expenses (%)+ 0.57 0.63 0.56 0.49* 0.52 1.05*
Ratio of net investment
income to average net
assets prior to reduced
fees and absorbed
expenses (%)+ 1.58 1.94 2.01 2.17* 2.28 2.16*
</TABLE>
++ For the period April 2, 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
F-32
<PAGE> 86
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To the Trustees
and Shareholders of the Schwab 1000 Fund(R)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Schwab 1000 Fund (one of the series constituting Schwab Investments,
hereafter referred to as the "Trust") at August 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and the 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 audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1996 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
1996 SPECIAL TAX INFORMATION (UNAUDITED)
- ------------------------------------------------------------------------------
NOTICE TO CORPORATE SHAREHOLDERS
100% of the Fund's distributions for the fiscal year ended August 31, 1996
qualify for the corporate dividends received deduction.
- ------------------------------------------------------------------------------
F-33
<PAGE> 87
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>
F-34
<PAGE> 88
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.
F-35
<PAGE> 89
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>
F-36
<PAGE> 90
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.
F-37
<PAGE> 91
- ------------------------------------------------------------------------------
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.
F-38
<PAGE> 92
- ------------------------------------------------------------------------------
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.
F-39
<PAGE> 93
- ------------------------------------------------------------------------------
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.
F-40
<PAGE> 94
- ------------------------------------------------------------------------------
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.
F-41
<PAGE> 95
- ------------------------------------------------------------------------------
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.
F-42
<PAGE> 96
- ------------------------------------------------------------------------------
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).
F-43
<PAGE> 97
- ------------------------------------------------------------------------------
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>
F-44
<PAGE> 98
- ------------------------------------------------------------------------------
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
F-45
<PAGE> 99
- ------------------------------------------------------------------------------
<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
F-46
<PAGE> 100
- ------------------------------------------------------------------------------
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.
/s/ Price Waterhouse LLP
- -------------------------
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
F-47
<PAGE> 101
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--97.6%(a)
ALABAMA--2.0%
Alabama Special Care Facilities Finance Authority
of Birmingham Hospital Revenue Bonds (Daughters
of Charity National Health System--St.
Vincent's Hospital & Providence) Series 1995
(Aa AA)
7.00%, 11/01/01 $1,000 $1,087
-----
ALASKA--2.2%
Anchorage, Alaska Refunding School Bonds Series
1993A/(MBIA Insurance)(Aaa AAA)
5.10%, 08/01/99 1,145 1,161
-----
ARIZONA--3.8%
Phoenix, Arizona Civic Improvement Corp.
Wastewater Systems Lease Revenue Bonds Series
1993 (A1 A)
5.10%, 07/01/99 1,005 1,021
Phoenix, Arizona Senior Lien Street & Highway
Revenue Refunding Bonds Series 1992 (A1 AA)
5.95%, 07/01/00 1,000 1,039
-----
2,060
-----
CALIFORNIA--2.8%
Sacramento County, California Transportation
Authority Tax & Revenue Anticipation Notes
(MIG1 SP1+)
4.50%, 09/30/97 1,500 1,507
-----
CONNECTICUT--6.7%
Connecticut State Special Tax Obligation
Refunding Bonds (Transportation Infrastructure
Purposes) Series 1995C/(FGIC Insurance)
(Aaa AAA)
5.50%, 10/01/00 2,000 2,065
Connecticut State Unlimited General Obligation
Series 1996B (Aa AA-)
5.00%, 08/15/01 1,500 1,522
-----
3,587
-----
ILLINOIS--2.2%
Illinois Health Facility Authority Revenue Bonds
(OSF Healthcare System) Series 1993 (A1 A+)
5.13%, 11/15/00 1,145 1,152
-----
INDIANA--1.5%
Indiana University Student Fee Revenue Bonds
Series J (A1 AA-)
4.00%, 08/01/97 800 798
-----
</TABLE>
F-48
<PAGE> 102
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
IOWA--4.2%
Black Hawk County, Iowa Hospital Facilities
Revenue Bonds (Allen Memorial Hospital) Series
1990 (Pre-Refunded)/(AMBAC Insurance & Escrowed to
Maturity with Government Securities)(Aaa AAA)
7.38%, 02/01/01 $2,000 $2,245
-----
KENTUCKY--5.0%
Kentucky Housing Corp. Housing Revenue Bonds
Series 1993B/(Multiple Credit Enhancements)
(Aaa AAA)
4.45%, 07/01/00 1,000 987
Kentucky State Property & Buildings Commission
Revenue Refunding Bonds (Project 55)(A A+)
4.15%, 09/01/99 1,735 1,712
-----
2,699
-----
MARYLAND--5.9%
Washington, Maryland Suburban Sanitation District
Sewage Disposal Refunding Bonds (Montgomery &
Prince George Counties, Maryland)(Aa1 AA)
6.00%, 11/01/99 3,000 3,135
-----
MASSACHUSETTS--5.7%
Massachusetts Municipal Wholesale Electric Co.
Power Supply Systems Revenue Bonds Series
1992E/ (AMBAC Insurance)(Aaa AAA)
5.50%, 07/01/00 2,000 2,055
Massachusetts State Health & Educational
Facilities Authority Revenue Bonds (Brigham &
Womens Hospital) Series E (A1 A+)
4.40%, 07/01/00 1,000 990
-----
3,045
-----
MICHIGAN--2.1%
Michigan State Hospital Finance Authority Revenue
Bonds (McLaren Obligated Group)/(Escrowed to
Maturity with Government Securities)(Aaa -)
7.00%, 09/15/00 1,000 1,104
-----
</TABLE>
F-49
<PAGE> 103
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MINNESOTA--8.6%
Minneapolis, Minnesota Community Development
Agency Tax Increment Revenue Bonds/(MBIA
Insurance)(Aaa AAA)
7.00%, 09/01/00 $1,000 $1,087
Minnesota State Housing Finance Agency Rental
Housing Revenue Bonds Series D/(MBIA
Insurance)(Aaa AAA)
4.80%, 08/01/01 2,390 2,378
St. Paul, Minnesota Sewer Revenue Bonds Series A
(A BBB+)
8.00%, 12/01/98 1,050 1,133
-----
4,598
-----
MISSISSIPPI--3.8%
Mississippi Hospital Equipment & Facilities
Authority Revenue Refunding Bonds (Mississippi
Baptist Medical Center)/(MBIA Insurance)
(Aaa AAA)
5.25%, 05/01/01 2,000 2,025
-----
MISSOURI--1.0%
Missouri State Environmental Improvement & Energy
Resources Authority Water Pollution Control
Revenue Bonds (State Revolving Fund Program)
Series 1992A (Aa -)
5.80%, 07/01/99 500 518
-----
NEW YORK--7.6%
New York State Dormitory Authority Lease Revenue
Refunding Bonds (State University Dormitory
Facilities) Series 1995A/(AMBAC Insurance)
(Aaa AAA)
5.10%, 07/01/01 4,000 4,070
-----
OHIO--3.7%
Ohio State Public Facilities Higher Education
Capital Facilities Revenue Bonds Series
IIA/(MBIA Insurance)(Aaa AAA)
4.38%, 11/01/00 2,000 1,982
-----
RHODE ISLAND--2.8%
Rhode Island Student Loan Authority Student Loan
Revenue Put Bonds Series 96-1/(National
Westminster Bank LOC)(- AA)
4.00%, 06/01/97 1,500 1,498
-----
</TABLE>
F-50
<PAGE> 104
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
SOUTH CAROLINA--6.3%
Charleston, South Carolina Public Facilities
Certificates of Participation (Public
Improvement Project) Series 1993/(AMBAC
Insurance)(Aaa AAA)
4.30%, 09/01/00 $1,085 $ 1,061
Greenville Hospital System Board of Trustees,
South Carolina Hospital Facilities Revenue
Refunding Bonds Series 1993C (- AA-)
5.00%, 05/01/00 1,090 1,089
South Carolina State Public Service Authority
Power/Electric Revenue Refunding Bonds Series
1991A (Santee Cooper)(A1 A+)
5.60%, 07/01/00 1,200 1,229
------
3,379
------
TENNESSEE--5.1%
Knox County, Tennessee Health & Education
Hospital Facilities Revenue Bonds (Fort Sanders
Alliance) Series 1990C (Pre-Refunded)/(MBIA
Insurance)
(Aaa AAA)
7.00%, 01/01/00 2,500 2,725
------
TEXAS--3.8%
Houston, Texas General Obligation Revenue Bonds
Series 1995A (Aa AA-)
5.30%, 03/01/01 1,000 1,017
Houston, Texas Water Conveyance System Contract
Certificates of Participation Series 1993E/
(AMBAC Insurance)(Aaa AAA)
5.50%, 12/15/97 1,000 1,018
------
2,035
------
WASHINGTON--8.9%
Port of Seattle, Washington Revenue Bonds
Series B/(FGIC Insurance)(Aaa AAA)
5.50%, 09/01/02 2,775 2,834
Washington State Public Power Supply System
Revenue Refunding Bonds (Nuclear Project #2)
Series A (Aa AA)
4.63%, 07/01/98 2,000 1,997
------
4,831
------
WISCONSIN--1.9%
Wisconsin State Health & Education Facilities
Authority Revenue Bonds (Aurora Medical Group
Project) Series 1996/(FSA Insurance)(Aaa AAA)
4.90%, 11/15/02 1,000 994
------
TOTAL MUNICIPAL BONDS
(Cost $52,294) 52,235
------
</TABLE>
F-51
<PAGE> 105
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--2.2%(b)
CALIFORNIA--1.4%
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985A-1/(Sumitomo Bank
LOC)(- A-1)
3.75%, 09/01/96 $800 $ 800
-------
GEORGIA--0.6%
Hapeville, Georgia Industrial Development
Authority Revenue Bonds (Hapeville Hotel Ltd. Project)/
(Deutsche Bank LOC)(P-1 -)
3.80%, 09/01/96 300 300
------
NEW YORK--0.2%
New York City General Obligation Bonds Series
1993B-2 Subseries B-5/(Morgan Guaranty Trust
LOC)(VMIG1 A-1)
4.00%, 09/01/96 100 100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $1,200) 1,200
-------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--MuniFund Portfolio
3.01%, 09/07/96 95 95
-------
TOTAL CASH EQUIVALENTS
(Cost $95) 95
-------
TOTAL INVESTMENTS--100.0%
(Cost $53,589) $53,530
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
F-52
<PAGE> 106
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--99.3%(a)
ALASKA--9.8%
Kodiak Island Borough, Alaska General Obligation
Bonds Series 1994A/(AMBAC Insurance)(Aaa AAA)
5.40%, 02/15/10 $2,500 $2,393
Valdez, Alaska Marine Terminal Revenue Refunding
Bonds (BP Pipeline Project) Series 1993B
(Aa3 AA-)
5.50%, 10/01/28 2,000 1,840
-----
4,233
-----
ARIZONA--5.2%
Maricopa County, Arizona Alhambra Elementary School
District 68 School Improvement & Refunding Bonds
Series 1994A/(AMBAC Insurance)(Aaa AAA)
6.80%, 07/01/12 2,000 2,225
-----
CALIFORNIA--4.0%
San Francisco, California Downtown Parking Corp.
Parking Revenue Bonds Series 1993 (A -)
6.65%, 04/01/18 500 510
Santa Clara County, California Financing Authority
Lease Revenue Bonds (VMC Facility Replacement
Project) Series 1994A/(AMBAC Insurance)(Aaa AAA)
7.75%, 11/15/10 1,000 1,216
-----
1,726
-----
CONNECTICUT--0.5%
Connecticut State Housing Finance Authority Bonds
(Housing Mortgage Finance Program) Series 1990B
Subseries B-1 (Aa AA)
7.55%, 11/15/08 225 230
-----
FLORIDA--2.9%
Hillsborough County, Florida Aviation Revenue Bonds
(Tampa International Airport) Series B/
(FGIC Insurance)(Aaa AAA)
5.88%, 10/01/23 1,250 1,247
-----
ILLINOIS--2.6%
Illinois State Toll Highway Authority Priority
Revenue Bonds Series 1992A (A1 A+)
6.38%, 01/01/15 1,100 1,140
-----
</TABLE>
F-53
<PAGE> 107
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
INDIANA--2.5%
Indiana State Office Building Correctional
Facilities Revenue Bonds Series A/(AMBAC Insurance)
(Aaa AAA)
5.50%, 07/01/20 $1,170 $1,097
-----
IOWA--2.6%
Ames, Iowa Hospital Revenue Bonds (Mary Greeley
Medical Center Project) Series 1993/
(AMBAC Insurance)(Aaa AAA)
5.70%, 08/15/12 500 497
Cedar Rapids, Iowa Hospital Facilities Revenue
Bonds (St. Luke's Methodist Project) Series 1993/
(FGIC Insurance)(Aaa AAA)
6.13%, 08/15/13 600 608
-----
1,105
-----
MARYLAND--2.2%
Maryland State Health & Educational Facilities
Authority Revenue Bonds (Mercy Medical Center)/
(FSA Insurance)(Aaa AAA)
5.63%, 07/01/17 1,000 967
-----
MASSACHUSETTS--2.0%
Massachusetts State Housing Finance Agency Multi
Family Residential Housing Revenue Bonds
Series 1989A (A A+)
7.80%, 08/01/22 800 846
-----
MICHIGAN--4.1%
Michigan State Hospital Finance Authority
Revenue Bonds (St. John's Hospital & Medical
Center)/(AMBAC Insurance)(Aaa AAA)
5.25%, 05/15/26 2,000 1,782
-----
MISSISSIPPI--5.1%
Mississippi Hospital Equipment & Facilities
Authority Revenue Refunding Bonds (Mississippi Baptist
Medical Center) Series 1995/(MBIA Insurance)
(Aaa AAA)
6.00%, 05/01/13 2,150 2,185
-----
MISSOURI--2.3%
Kansas City, Missouri School District Building
Revenue Bonds (Capital Improvement Project)
Series 1993/(FGIC Insurance)(Aaa AAA)
5.15%, 02/01/08 1,000 974
-----
</TABLE>
F-54
<PAGE> 108
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
NEVADA--4.4%
Nevada State Municipal Bonds General Obligation
Series A/(FGIC Insurance)(Aaa AAA)
5.50%, 11/01/25 $2,000 $1,890
-----
NEW HAMPSHIRE--1.7%
New Hampshire Higher Education & Health Facilities
Authority Hospital Revenue Bonds (Mary Hitchcock
Memorial Hospital) Series 1993A/(FGIC Insurance)
(Aaa AAA)
5.25%, 08/15/08 750 728
-----
NEW MEXICO--1.1%
Santa Fe, New Mexico Utility Sewer Revenue Bonds
Series 1995A/(AMBAC Insurance)(Aaa AAA)
5.25%, 06/01/17 500 461
-----
NEW YORK--4.3%
New York State General Obligation Bonds
Series 1996A (A A-)
5.30%, 07/15/15 2,000 1,867
-----
PENNSYLVANIA--9.6%
Pennsylvania Higher Education Facilities Authority
Revenue Bonds (University of Pennsylvania Health
Services) Series 1996A (Aa AA)
5.75%, 01/01/17 2,000 1,945
Philadelphia, Pennsylvania Hospitals & Higher
Education Facilities Authority Revenue Refunding
Bonds (Children's Hospital) Series 1993A (Aa AA)
5.25%, 02/15/08 1,000 970
Pittsburgh, Pennsylvania Water & Sewer Authority
Revenue Bonds Series B/(FSA Insurance)(Aaa AAA)
5.75%, 09/01/25 1,250 1,208
-----
4,123
-----
RHODE ISLAND--2.4%
Rhode Island Housing & Mortgage Finance Corp.
Homeownership Opportunity Bonds Series 10A
(Aa AA+)
6.50%, 10/01/22 1,000 1,026
-----
SOUTH CAROLINA--3.5%
Piedmont, South Carolina Municipal Power Agency
Electric Revenue Refunding Bonds Series 1992/
(MBIA Insurance)(Aaa AAA)
6.20%, 01/01/08 1,400 1,498
-----
</TABLE>
F-55
<PAGE> 109
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
TEXAS--9.6%
Copperas Cove, Texas Health Facilities Development
Corp. Hospital Revenue Bonds (Adventist Health
Systems/Sunbelt Obligated Group) Series 1995/
(MBIA Insurance)(Aaa AAA)
5.88%, 11/15/25 $1,500 $ 1,458
Harris County, Texas Revenue Refunding Bonds
(Toll Road Senior Lien) Series 1994/(FGIC
Insurance) (Aaa AAA)
5.38%, 08/15/20 1,000 929
Texas State Public Finance Authority General
Obligation Bonds Series 1994B (Aa AA)
5.75%, 10/01/14 1,025 1,029
University of Texas Revenue Refunding Bonds
Series B (Aa1 AAA)
6.75%, 08/15/13 680 738
------
4,154
------
UTAH--4.0%
Intermountain Power Agency, Utah Power Supply
Revenue Bonds Series 1996D (Aa AA-)
5.00%, 07/01/21 2,000 1,737
------
VIRGINIA--6.5%
Capital Region, Virginia Airport Commission Revenue
Bonds (Richmond International Airport) Series
1995A/(AMBAC Insurance)(Aaa AAA)
5.63%, 07/01/15 1,000 975
Chesapeake Bay Bridge & Tunnel Commission,
Virginia Revenue Refunding Bonds/
(MBIA Insurance)(Aaa AAA)
5.25%, 07/01/19 2,000 1,825
------
2,800
------
WASHINGTON--6.4%
King County, Washington School District General
Obligation Bonds No. 415 Series A (A1 AA-)
5.55%, 12/01/11 500 498
Seattle, Washington Municipal Light & Power Revenue
Refunding Bonds Series 1993 (Aa AA)
5.40%, 05/01/08 2,300 2,266
------
2,764
------
TOTAL MUNICIPAL BONDS
(Cost $42,511) 42,805
------
</TABLE>
F-56
<PAGE> 110
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--0.5%(b)
CALIFORNIA--0.2%
California Pollution Control Financing Authority
Pollution Control Revenue Bonds (Burney Forest
Project) Series 1988A/(Fleet Bank LOC)(- P-1)
3.70%, 09/01/96 $100 $ 100
------
FLORIDA--0.3%
Hillsborough County, Florida Industrial Development
Agency Pollution Control Revenue Refunding Bonds
(Tampa Electric/Gannon Coal Conversion Project)
Series 1992 (VMIG1 A-1+)
3.75%, 09/01/96 100 100
------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $200) 200
------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--MuniFund Portfolio
3.01%, 09/07/96 94 94
--------
TOTAL CASH EQUIVALENTS
(Cost $94) 94
--------
TOTAL INVESTMENTS--100.0%
(Cost $42,805) $43,099
========
</TABLE>
F-57
<PAGE> 111
- ------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1996
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Corporation which were in effect at August 31, 1996. These
ratings are unaudited.
(a) Interest rates represent coupon rate of security.
(b) Interest rates vary periodically based on current market rates. Rates
shown are the effective rates on August 31, 1996. Dates shown represent
the latter of the demand date or next interest rate change date, which
is considered the maturity date for financial reporting purposes. For
variable rate securities without demand features the next interest
reset date is shown.
(c) Interest rates represent the yield on August 31, 1996.
<TABLE>
<CAPTION>
Abbreviations
-------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
F-58
<PAGE> 112
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $53,589 and $42,805,
respectively) $ 53,530 $43,099
Interest receivable 705 600
Receivable from advisor -- 11
Receivable for Fund shares sold 2 --
Deferred organization costs 31 16
Prepaid expenses 19 27
------- -------
Total assets 54,287 43,753
------- -------
LIABILITIES
Payable for:
Dividends 29 31
Fund shares redeemed 69 3
Deferred organization costs -- 4
Other 57 43
------- -------
Total liabilities 155 81
------- -------
Net assets applicable to outstanding
shares $ 54,132 $43,672
======= =======
NET ASSETS CONSIST OF:
Capital paid in $ 54,716 $43,753
Accumulated undistributed net
investment income 12 15
Accumulated net realized loss on
investments sold (537) (390)
Net unrealized gain (loss) on
investments (59) 294
------- -------
$ 54,132 $43,672
======= =======
PRICING OF SHARES
Outstanding shares, $0.00001 par
value (unlimited shares authorized) 5,393 4,312
Net asset value, offering and
redemption price per share $ 10.04 $ 10.13
</TABLE>
See accompanying Notes to Financial Statements.
F-59
<PAGE> 113
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
Interest income $ 2,404 $ 2,405
-------- --------
Expenses:
Investment advisory and
administration fee 216 177
Transfer agency and shareholder
service fees 132 108
Custodian fees 37 31
Registration fees 18 13
Professional fees 22 29
Shareholder reports 21 17
Trustees' fees 4 4
Amortization of deferred organization
costs 15 17
Insurance and other expenses 9 10
-------- --------
474 406
Less expenses reduced and absorbed (216) (194)
-------- --------
Total expenses incurred by Fund 258 212
-------- --------
Net investment income 2,146 2,193
-------- --------
Net realized gain (loss) on investments
sold:
Proceeds from sales of investments 67,974 61,630
Cost of investments sold (67,824) (61,207)
-------- --------
Net realized gain on investments
sold 150 423
-------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 531 929
End of period (59) 294
-------- --------
Decrease in net unrealized gain on
investments (590) (635)
-------- --------
Net loss on investments (440) (212)
-------- --------
Increase in net assets resulting from
operations $ 1,706 $ 1,981
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-60
<PAGE> 114
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Year ended August 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,146 $ 2,261 $ 2,193 $ 2,238
Net realized gain (loss) on
investments sold 150 (448) 423 (806)
Increase (decrease) in net unrealized
gain on investments (590) 1,372 (635) 1,600
-------- -------- -------- --------
Increase in net assets resulting from
operations 1,706 3,185 1,981 3,032
-------- -------- -------- --------
Dividends to shareholders from
net investment income (2,147) (2,255) (2,193) (2,232)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 19,101 17,344 18,452 21,437
Net asset value of shares issued in
reinvestment of dividends 1,701 1,746 1,569 1,626
Less payments for shares redeemed (18,733) (31,405) (17,550) (26,425)
-------- -------- -------- --------
Increase (decrease) in net assets
from capital share transactions 2,069 (12,315) 2,471 (3,362)
-------- -------- -------- --------
Total increase (decrease) in net assets 1,628 (11,385) 2,259 (2,562)
-------- -------- -------- --------
Net assets:
Beginning of period 52,504 63,889 41,413 43,975
-------- -------- -------- --------
End of period (including
undistributed net investment income
of $12, $13, $15 and $15,
respectively) $ 54,132 $ 52,504 $ 43,672 $ 41,413
======== ======== ======== ========
Number of Fund shares:
Sold 1,891 1,754 1,797 2,196
Reinvested 168 176 153 166
Redeemed (1,854) (3,185) (1,714) (2,707)
-------- -------- -------- --------
Net increase (decrease) in shares
outstanding 205 (1,255) 236 (345)
Shares outstanding:
Beginning of period 5,188 6,443 4,076 4,421
-------- -------- -------- --------
End of period 5,393 5,188 4,312 4,076
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-61
<PAGE> 115
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
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 Short/Intermediate Government Bond Fund, Schwab Long-Term Government Bond
Fund, Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund. The assets of each series are
segregated and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income that is exempt from federal income tax, consistent with
preservation of capital. The Funds, which are not "diversified" investment
companies within the meaning of the Investment Company Act of 1940, as amended,
each invest primarily in debt obligations issued by or on behalf of states,
territories and possessions of the United States Government, its agencies or
instrumentalities, the interest of which is not subject to federal income tax.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
F-62
<PAGE> 116
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
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 on
investments. Realized gains and losses from security transactions are determined
on an identified cost basis. For callable bonds purchased at a premium, the
excess of the purchase price over the call value is amortized against interest
income through the call date. If the call provision is not exercised, any
remaining premium is amortized through the final maturity date.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, 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.
All distributions paid by the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund during the year ended August 31, 1996
qualify as exempt interest dividends for federal tax purposes.
F-63
<PAGE> 117
- ------------------------------------------------------------------------------
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized loss for the Schwab Short/Intermediate Tax-Free Bond Fund
aggregated $59,000, of which $218,000 related to appreciated securities and
$277,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Tax-Free Bond Fund aggregated $294,000, of which $866,000
related to appreciated securities and $572,000 related to depreciated
securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. Under this agreement, the Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund incurred investment
advisory and administration fees of $216,000 and $177,000, 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 Tax-Free Bond
Fund and Schwab Long-Term Tax-Free Bond Fund incurred transfer agency and
shareholder service fees of $132,000 and $108,000, respectively, before Schwab
reduced its fees (see Note 4).
F-64
<PAGE> 118
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
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 $8,000
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
$84,000 and $86,000 for the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund, respectively, and the total of such fees
reduced by Schwab were $132,000 and $108,000 for the Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free 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
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
<S> <C> <C>
Purchases $28,329 $24,831
Proceeds of sales and
maturities $22,168 $19,569
</TABLE>
F-65
<PAGE> 119
- ------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Tax-Free Bond Fund
----------------------------------------------
Period ended
Year ended August 31, August 31,
1996 1995 1994 1993++
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Net asset value at beginning of
period $ 10.12 $ 9.92 $ 10.15 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income 0.41 0.40 0.37 0.13
Net realized and unrealized gain
(loss) on investments (0.08) 0.20 (0.23) 0.15
------- ------- ------- -------
Total from investment operations 0.33 0.60 0.14 0.28
Less distributions
- ------------------
Dividends from net investment
income (0.41) (0.40) (0.37) (0.13)
Distributions from realized gain
on investments -- -- -- --
------- ------- ------- -------
Total distributions (0.41) (0.40) (0.37) (0.13)
------- ------- ------- -------
Net asset value at end of period $ 10.04 $ 10.12 $ 9.92 $ 10.15
======= ======= ======= =======
Total return (%) 3.32 6.23 1.42 2.83
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $54,132 $52,504 $63,889 $ 54,450
Ratio of expenses to average net
assets (%) 0.49 0.49 0.48 0.45*
Ratio of net investment income to
average net assets (%) 4.06 4.06 3.71 3.63*
Portfolio turnover rate (%) 44 35 19 11
- ---------------
Ratio of expenses to average net
assets prior to reduced fees
and absorbed expenses (%)+ 0.90 0.89 0.91 1.26*
Ratio of net investment income to
average net assets prior to
reduced fees and absorbed
expenses (%)+ 3.65 3.66 3.28 2.82*
</TABLE>
++ For the period April 21, 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
F-66
<PAGE> 120
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
6. FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Schwab Long-Term Tax-Free Bond Fund
-----------------------------------------------------------------
Eight months Period
ended ended
Year ended August 31, August 31, December 31,
1996 1995 1994 1993 1992++
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00
Income from investment
- ----------------------
operations
- -----------
Net investment income 0.52 0.53 0.52 0.36 0.17
Net realized and unrealized
gain (loss) on investments (0.03) 0.21 (0.56) 0.67 (0.08)
------- ------- ------- ------- -------
Total from investment
operations 0.49 0.74 (0.04) 1.03 0.09
Less distributions
- ------------------
Dividends from net investment
income (0.52) (0.53) (0.52) (0.36) (0.17)
Distributions from realized
gain on investments -- -- (0.08) -- --
------- ------- ------- ------- -------
Total distributions (0.52) (0.53) (0.60) (0.36) (0.17)
------- ------- ------- ------- -------
Net asset value at end of
period $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= ======= =======
Total return (%) 4.87 7.76 (0.42) 10.56 0.92
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000s) $43,672 $41,413 $43,975 $ 50,413 $ 28,034
Ratio of expenses to average
net assets (%) 0.49 0.54 0.51 0.45* 0.45*
Ratio of net investment
income to average net
assets (%) 5.06 5.40 5.05 5.30* 5.61*
Portfolio turnover rate (%) 50 70 62 91 54
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees and absorbed expenses
(%)+ 0.94 0.93 0.99 1.18* 1.53*
Ratio of net investment
income to average net
assets prior to reduced
fees and absorbed expenses
(%)+ 4.61 5.01 4.57 4.57* 4.53*
</TABLE>
++ For the period September 11, 1992 (commencement of operations) to December
31, 1992.
+ 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
F-67
<PAGE> 121
- ------------------------------------------------------------------------------
To the Trustees and Shareholders of
the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Schwab Short/Intermediate
Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond Fund (two series
constituting part of Schwab Investments, hereafter referred to as the "Trust")
at August 31, 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.
/s/ Price Waterhouse LLP
- -------------------------
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
F-68
<PAGE> 122
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--98.1%(a)
California Housing Finance Agency Home Mortgage
Revenue Bonds Series G (Aa AA-)
5.65%, 02/01/98 $ 500 $ 506
5.65%, 08/01/98 585 594
5.85%, 08/01/99 320 328
6.00%, 08/01/00 410 422
California State Public Works Board Lease Revenue
Refunding Bonds (California Community College
Projects) Series 1993A (A A-)
4.70%, 12/01/99 1,000 1,002
California State Public Works Board Lease Revenue
Refunding Bonds (California State University)
Series 1993A (A A-)
4.30%, 12/01/99 2,000 1,982
California State Public Works Board Lease Revenue
Refunding Bonds (Department of Corrections State
Prisons) Series A/(AMBAC Insurance) (Aaa AAA)
4.70%, 12/01/00 1,865 1,874
California State Public Works Board Lease Revenue
Refunding Bonds (Department of Corrections-State
Prison-Susanville) Series D (A A-)
4.40%, 06/01/00 1,000 986
California State Public Works Board Lease Revenue
Refunding Bonds (Various University of
California Projects) Series A (A A-)
4.70%, 06/01/00 1,020 1,011
California State Public Works Board Lease Revenue
Refunding Bonds (Various University of
California Projects) Series A/
(AMBAC Insurance) (Aaa AAA)
5.60%, 12/01/01 2,000 2,085
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates of
Participation (St. Joseph Health Systems)
(Aa AA)
5.30%, 07/01/00 2,035 2,078
California Statewide Community Development
Authority Hospital Revenue Refunding Bonds
Certificates of Participation (Cedars-Sinai
Medical Center) (A1 -)
4.40%, 11/01/00 1,235 1,204
Contra Costa County, California Transportation
Authority Sales Tax Revenue Bonds Series A/
(FGIC Insurance) (Aaa AAA)
4.80%, 03/01/01 1,000 1,005
Foothill, California Transit Zone Certificates of
Participation Refunding Bonds Referendum
Series A (Baa1 -)
4.50%, 05/01/97 1,000 1,000
4.50%, 11/01/97 1,000 1,000
</TABLE>
F-69
<PAGE> 123
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Garden Grove, California Tax Allocation Refunding
Bonds (Community Development Projects) (- A)
4.70%, 10/01/98 $1,060 $1,059
Los Angeles County, California Flood Control
District Revenue Bonds (Aa1 AA-)
4.30%, 03/01/00 1,090 1,082
Los Angeles, California Convention & Exhibition
Center Authority Certificates of Participation
Series A/(Escrowed to Maturity with Government
Securities) (Aaa AAA)
7.38%, 08/15/99 1,000 1,095
Los Angeles, California State Building Authority
Revenue Refunding Bonds (California Department
of General Services) Series A (A A-)
4.50%, 05/01/98 400 399
4.70%, 05/01/99 450 449
Los Angeles, California Unified School District
Certificates of Participation (Multiple
Properties) Series 1994B/(AMBAC Insurance)
(Aaa AAA)
5.70%, 12/01/99 3,215 3,339
Los Angeles, California Wastewater System Revenue
Bonds Series A (A1 A)
6.60%, 02/01/99 1,775 1,857
Morgan Hill, California Unified School District
Certificates of Participation (A1 -)
4.80%, 08/01/99 510 509
Northern California Power Agency Revenue Bonds
(Geothermal Project No. 3) Series B/(AMBAC
Insurance) (Aaa AAA)
5.00%, 07/01/99 1,360 1,382
Orange County, California Municipal Water
Facilities Certificates of Participation
(Allen-McColloch Pipeline)/(MBIA Insurance)
(Aaa AAA)
4.60%, 07/01/01 3,000 2,977
Port of Long Beach, California Harbor Revenue
Bonds (Aa AA-)
7.10%, 05/15/99 2,000 2,127
Rancho, California Water District Financing
Authority Revenue Bonds/(Toronto-Dominion Bank
LOC) (Aa2 AA)
4.70%, 09/15/01 2,000 1,967
Riverside County, California Public Financing
Authority Special Tax Revenue Bonds Series
A/(MBIA Insurance) (Aaa AAA)
4.40%, 09/01/01 1,750 1,724
San Diego County, California Tax & Revenue
Anticipation Notes (MIG1 SP1+)
4.38%, 09/30/97 1,500 1,505
San Francisco, California Port Commission Revenue
Refunding Bonds (A BBB+)
5.00%, 07/01/00 1,500 1,500
</TABLE>
F-70
<PAGE> 124
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
San Joaquin, California Area Flood Control Agency
Special Assessment Bonds/(FSA Insurance) (Aaa -)
5.10%, 09/02/03 $1,700 $1,702
San Ramon Valley, California Unified School
District Certificates of Participation (Measure
A Capital Project) Series A/(Escrowed to
Maturity with Government Securities) (A -)
4.90%, 10/01/99 1,100 1,104
Santa Monica, California Wastewater Enterprise
Revenue Bonds (Hyperion Project) Series A
(Pre-Refunded) (A1 A+)
6.25%, 01/01/02 1,250 1,352
Stockton, California Health Facilities Revenue
Bonds (St. Joseph Medical Center) Series A/(MBIA
Insurance) (Aaa AAA)
4.60%, 06/01/00 200 199
TOTAL MUNICIPAL BONDS -------
(Cost $44,181) 44,405
-------
VARIABLE RATE OBLIGATIONS--1.7%(b)
California Pollution Control Financing Authority
Revenue Bonds (Burney Forest Project) Series
1988A/(National Westminster Bank LOC) (Aa3 -)
3.70%, 09/01/96 100 100
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986A (VMIG1 A-1+)
3.75%, 09/01/96 100 100
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985A-1/(Landesbank
Hessen-Thuringen Girozentrale LOC) (- A-1)
3.75%, 09/01/96 50 50
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 89-10)
(VMIG1 A-1+)
3.75%, 09/01/96 100 100
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 95-12)
Series 1996A/ (Kredietbank LOC) (Aa2 AA-)
3.75%, 09/01/96 300 300
</TABLE>
F-71
<PAGE> 125
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Orange County, California Sanitation District No.
123 Certificates of Participation (Capital
Improvement Program 1990-92) Series C/(FGIC
Insurance) (VMIG1 A-1+)
3.65%, 09/01/96 $100 $100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $750) 750
-------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--
California Money Fund Portfolio
2.97%, 09/07/96 86 86
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $86) 86
-------
TOTAL INVESTMENTS--100.0%
(Cost $45,017) $45,241
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
F-72
<PAGE> 126
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
MUNICIPAL BONDS--95.6%(a)
Alameda County, California Public Facilities
Corp. Certificates of Participation (Capital
Projects) (A A+)
6.25%, 06/01/06 $1,000 $1,041
Alta Loma, California Elementary School District
General Obligation Bonds Series 2/(AMBAC
Insurance) (Aaa AAA)
5.88%, 06/01/08 840 868
5.88%, 06/01/09 860 884
Antioch Area, California Public Facilities
Financing Agency Special Tax Community
Facilities Revenue Bonds Series 89-1/(FGIC
Insurance) (Aaa AAA)
5.25%, 08/01/07 1,985 1,973
Bakersfield, California Hospital Revenue Bonds
(Bakersfield Memorial Hospital) Series 1992A
(A A-)
6.50%, 01/01/22 1,000 1,005
California Educational Facilities Authority
Revenue Bonds (Loyola Marymount University)
Series 1992B (A1 -)
6.60%, 10/01/22 1,450 1,537
California Educational Facilities Authority
Revenue Bonds (Mills College) Series 1992
(A -)
6.88%, 09/01/22 500 527
California Educational Facilities Authority
Revenue Bonds (St. Mary's College) Series 1993
(A -)
5.00%, 10/01/12 3,000 2,707
California Health Facilities Financing Authority
Revenue Bonds (Assoc. of Retarded Citizens)
Series 1991/(California Mortgage Insurance)
(- A)
7.00%, 05/01/21 455 477
California Health Facilities Financing Authority
Revenue Bonds (Children's Hospital)/(MBIA
Insurance) (Aaa AAA)
5.38%, 07/01/16 5,180 4,882
California Health Facilities Financing Authority
Revenue Bonds (Marshall Hospital)
Series 1992A/(California Mortgage Insurance)
(- A)
6.63%, 11/01/22 4,000 4,125
California Housing Finance Agency Home Mortgage
Revenue Bonds Series 1994G (Aa AA-)
7.20%, 08/01/14 3,000 3,150
California Housing Finance Agency Home Mortgage
Revenue Bonds Series 1995L/(MBIA Insurance)
(Aaa AAA)
5.90%, 08/01/17 1,000 986
</TABLE>
F-73
<PAGE> 127
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
California Housing Finance Agency Multi Unit
Rental Housing Revenue Bonds II Series 1992B
(A1 A+)
6.70%, 08/01/15 $1,000 $1,039
California State Department of Water Resources
Revenue Bonds (Central Valley Project)
Series O (Aa AA)
5.00%, 12/01/22 2,200 1,928
California State Public Works Board Lease
Revenue Refunding Bonds (Various California
State University Projects) Series 1992A (A A-)
5.50%, 06/01/10 3,000 2,947
6.70%, 10/01/17 1,250 1,305
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates
of Participation (Cedars-Sinai Medical Center)
Series 1992 (A1 -)
6.50%, 08/01/15 1,250 1,277
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates
of Participation (St. Joseph Health Systems)
(Aa AA)
6.50%, 07/01/15 2,000 2,082
Central Coast Water Authority Revenue Bonds
(State Water Project Regional Facilities)
Series 1992/ (AMBAC Insurance) (Aaa AAA)
6.60%, 10/01/22 1,500 1,620
Chico, California Unified School District
General Obligation Bonds Series C/(MBIA
Insurance) (Aaa AAA)
6.75%, 06/01/17 500 539
Fresno, California Health Facility Revenue Bonds
(Holy Cross Health System--St. Agnes Medical
Center) Series 1991 (A1 AA-)
6.50%, 06/01/11 550 566
Los Angeles County, California Public Works
Financing Authority Lease Revenue Refunding
Bonds Series 1996A/(MBIA Insurance) (Aaa AAA)
5.25%, 09/01/13 2,000 1,897
Los Angeles County, California Transportation
Commission Sales Tax Revenue Refunding Bonds
Series 1991B (A1 A+)
6.50%, 07/01/13 555 572
Los Angeles, California Convention & Exhibition
Center Authority Lease Revenue Refunding Bonds
Series 1993A/(MBIA Insurance) (Aaa AAA)
5.13%, 08/15/21 1,000 890
</TABLE>
F-74
<PAGE> 128
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Los Angeles, California Department of Airports
Revenue Refunding Bonds Series 1995A/(FGIC
Insurance) (Aaa AAA)
5.50%, 05/15/10 $560 $556
Los Angeles, California Department of Water &
Power Electric Plant Revenue Bonds (Aa AA-)
6.00%, 01/15/11 865 881
Los Angeles, California Harbor Department
Revenue Bonds Series 1995A (Aa AA)
6.50%, 08/01/25 3,000 3,124
Monterey Bay, California Unified Air Pollution
Control Certificates of Participation
(Administration Building Project)/
(AMBAC Insurance) (- AAA)
5.70%, 12/01/15 875 856
Northern California Power Agency Multiple
Capital Facilities Revenue Bonds Series
1992A/(MBIA Insurance) (Aaa AAA)
6.50%, 08/01/12 3,300 3,523
Oceanside, California Building Authority
Certificates of Participation Refunding Bonds
Series 1993A (A BBB+)
6.38%, 04/01/12 1,250 1,259
Ontario, California Redevelopment Authority
Revenue Bonds (Project #1)/(MBIA Insurance &
Escrowed to Maturity with Government
Securities) (Aaa AA)
5.50%, 08/01/18 2,000 1,915
Orange County, California Water District
Certificates of Participation (1989 Project)
(Aa AA)
6.50%, 08/15/11 1,150 1,182
Oxnard, California Housing Finance Authority
Lease Revenue Bonds Series 1993/
(FSA Insurance) (Aaa AAA)
5.38%, 06/01/16 2,000 1,872
Petaluma, California Consolidated Public
Facilities Lease Certificates of Participation
Series 1993A/ (AMBAC Insurance) (Aaa AAA)
5.50%, 08/01/08 750 754
Sacramento, California Regional Transit District
Certificates of Participation
Series 1992A (A1 -)
6.38%, 03/01/05 250 262
Sacramento, California Regional Transit District
Refunding Certificates of Participation (Light
Rail Transportation Project) (A1 A+)
6.75%, 07/01/07 2,000 2,157
</TABLE>
F-75
<PAGE> 129
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Saddleback Community College District,
California Certificates of Participation
(Capital Improvement Project) Series
1996/(MBIA Insurance) (Aaa AAA)
5.50%, 06/01/21 $1,500 $1,417
San Bernardino County, California Certificates
of Participation (West Valley Detention
Center)/ (MBIA Insurance) (Aaa AAA)
6.50%, 11/01/12 420 448
San Diego County, California Regional
Communication System Certificates of Participation
Series 1996/(AMBAC Insurance) (Aaa AAA)
5.50%, 08/15/18 2,700 2,592
San Diego, California Public Facilities Finance
Authority Sewer Revenue Bonds/(FGIC Insurance)
(Aaa AAA)
5.00%, 05/15/25 4,045 3,555
San Francisco, California Bay Area Rapid Transit
District Sales Tax Revenue Bonds Series 1995/
(FGIC Insurance) (Aaa AAA)
5.50%, 07/01/15 1,500 1,451
5.50%, 07/01/20 2,000 1,915
San Francisco, California City & County Airports
Revenue Bonds 2nd Series, Issue 11/(FGIC
Insurance) (Aaa AAA)
6.20%, 05/01/19 2,000 2,032
San Francisco, California Port Commission
Revenue Refunding Bonds Series 1994 (A BBB+)
5.90%, 07/01/09 2,500 2,475
San Jose--Santa Clara, California Water
Financing Authority Sewer Revenue Bonds
Series A/(FGIC Insurance) (Aaa AAA)
5.38%, 11/15/20 1,500 1,402
Santa Clara County, California Financing
Authority Lease Revenue Bonds (VMC Facility
Replacement Project) Series 1994A/
(AMBAC Insurance) (Aaa AAA)
7.75%, 11/15/10 1,460 1,776
6.88%, 11/15/14 2,000 2,192
Santa Clara, California Redevelopment Agency Tax
Allocation Revenue Refunding Bonds (Bayshore
North Project)/(AMBAC Insurance) (Aaa AAA)
7.00%, 07/01/10 1,500 1,712
Southern California Public Power Authority
Revenue Bonds (San Juan Power Project Unit 3)
Series 1993A/(MBIA Insurance) (Aaa AAA)
5.38%, 01/01/08 2,500 2,487
5.00%, 01/01/20 2,000 1,767
</TABLE>
F-76
<PAGE> 130
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Temecula, California Community Services District
Certificates of Participation (Community
Recreation Center Project) Series 1992 (- A)
7.13%, 10/01/12 $1,000 $1,080
University of California Regents Housing System
Revenue Bonds Series 1993A/(MBIA Insurance)
(Aaa AAA)
5.50%, 11/01/18 2,000 1,907
University of California Revenue Refunding Bonds
(Multi Purpose Projects) Series C/(AMBAC
Insurance) (Aaa AAA)
5.13%, 09/01/18 3,500 3,154
Westminster, California Public Financing
Authority Certificates of Participation (1994
Civic Center & Street Improvement Project)
(- A-)
7.00%, 06/01/19 3,325 3,487
TOTAL MUNICIPAL BONDS ------
(Cost $94,081) 96,014
------
VARIABLE RATE OBLIGATIONS--4.3%(b)
California Pollution Control Financing Authority
Revenue Bonds (Aa3 AA)
3.75%, 09/01/96 100 100
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986C (P-1 A-1+)
3.75%, 09/01/96 400 400
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986D (P-1 A-1+)
3.75%, 09/01/96 100 100
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 95-12)
Series 1996A/(Kredietbank LOC) (VMIG1 A-1+)
3.75%, 09/01/96 100 100
Orange County, California Sanitation District
No. 123 Certificates of Participation (Capital
Improvement Program 1990-92) Series C/(FGIC
Insurance) (VMIG1 A-1+)
3.65%, 09/01/96 3,600 3,600
------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $4,300) 4,300
------
</TABLE>
F-77
<PAGE> 131
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
------- --------
<S> <C> <C>
CASH EQUIVALENTS -- 0.1%(c)
Provident Institutional Funds--California Money
Fund Portfolio
2.97%, 09/07/96 90 $90
--------
TOTAL CASH EQUIVALENTS
(Cost $90) 90
--------
TOTAL INVESTMENTS--100.0%
(Cost $98,471) $100,404
========
</TABLE>
See accompanying Notes to Schedules of Investments.
F-78
<PAGE> 132
- ------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1996
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Corporation which were in effect at August 31, 1996. These
ratings are unaudited.
(a) Interest rates represent coupon rate of security.
(b) Interest rates vary periodically based on current market rates. Rates shown
are the effective rates on August 31, 1996. Dates shown represent the
latter of the demand date or next interest rate change date, which is
considered the maturity date for financial reporting purposes. For variable
rate securities without demand features, the next interest reset date is
shown.
(c) Interest rates represent the yield on August 31, 1996.
<TABLE>
<CAPTION>
Abbreviations
- -------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
F-79
<PAGE> 133
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
---------------- ---------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $45,017 and $98,471,
respectively) $45,241 $100,404
Interest receivable 532 1,298
Receivable for Fund shares sold 96 75
Deferred organization costs 2 3
Prepaid expenses 9 1
------- --------
Total assets 45,880 101,781
------- --------
LIABILITIES
Payable for:
Dividends 26 72
Fund shares redeemed 16 35
Investment advisory and administration
fee -- 4
Other 50 54
------- --------
Total liabilities 92 165
------- --------
Net assets applicable to outstanding
shares $45,788 $101,616
======= ========
NET ASSETS CONSIST OF:
Capital paid in $46,401 $101,932
Accumulated undistributed
net investment income 11 36
Accumulated net realized loss on
investments sold (848) (2,285)
Net unrealized gain on investments 224 1,933
------- --------
$45,788 $101,616
======= ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 4,562 9,558
Net asset value, offering and redemption
price per share $10.04 $10.63
</TABLE>
See accompanying Notes to Financial Statements.
F-80
<PAGE> 134
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
---------------- ---------
<S> <C> <C>
Interest income $ 2,030 $ 5,685
-------- --------
Expenses:
Investment advisory and administration
fee 175 401
Transfer agency and shareholder service
fees 107 246
Custodian fees 31 67
Professional fees 32 37
Shareholder reports 13 28
Trustees' fees 4 6
Registration fees 2 4
Amortization of deferred organization
costs 1 1
Insurance and other expenses 9 13
-------- --------
374 803
Less expenses reduced (164) (323)
-------- --------
Total expenses incurred by Fund 210 480
-------- --------
Net investment income 1,820 5,205
-------- --------
Net realized gain (loss) on investments
sold:
Proceeds from sales of investments 45,305 111,367
Cost of investments sold (45,317) (110,925)
-------- --------
Net realized gain (loss) on
investments sold (12) 442
-------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 326 1,574
End of period 224 1,933
-------- --------
Increase (decrease) in net
unrealized gain on investments (102) 359
-------- --------
Net gain (loss) on investments (114) 801
-------- --------
Increase in net assets resulting
from operations $ 1,706 $ 6,006
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-81
<PAGE> 135
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
-------------------- --------------------
Year ended August 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,820 $ 1,791 $ 5,205 $ 5,074
Net realized gain (loss) on
investments sold (12) (767) 442 (1,880)
Increase (decrease) in net
unrealized gain on investments (102) 1,219 359 2,086
-------- -------- -------- --------
Increase in net assets
resulting from operations 1,706 2,243 6,006 5,280
-------- -------- -------- --------
Dividends to shareholders from
net investment income (1,820) (1,786) (5,205) (5,061)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 19,657 12,494 31,008 22,400
Net asset value of shares issued in
reinvestment of dividends 1,443 1,403 3,436 3,479
Less payments for shares redeemed (15,837) (22,364) (23,674) (42,485)
-------- -------- -------- --------
Increase (decrease) in net assets
from capital share transactions 5,263 (8,467) 10,770 (16,606)
-------- -------- -------- --------
Total increase (decrease) in net
assets 5,149 (8,010) 11,571 (16,387)
Net assets:
Beginning of period 40,639 48,649 90,045 106,432
-------- -------- -------- --------
End of period (including
undistributed net investment
income of $11, $11, $36 and $36,
respectively) $ 45,788 $ 40,639 $101,616 $ 90,045
======== ======== ======== ========
Number of Fund shares:
Sold 1,951 1,271 2,893 2,201
Reinvested 143 143 321 342
Redeemed (1,572) (2,293) (2,210) (4,220)
-------- -------- -------- --------
Net increase (decrease) in
shares outstanding 522 (879) 1,004 (1,677)
Shares outstanding:
Beginning of period 4,040 4,919 8,554 10,231
-------- -------- -------- --------
End of period 4,562 4,040 9,558 8,554
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-82
<PAGE> 136
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUNDS
The Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free 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 Short/Intermediate Government Bond Fund, Schwab Long-Term Government 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 that is exempt from federal income and State of California
personal income taxes, consistent with preservation of capital. The Funds, which
are not "diversified" investment companies within the meaning of the Investment
Company Act of 1940, as amended, each invest primarily in debt obligations
issued by or on behalf of the State of California, its political subdivisions,
agencies or instrumentalities, the interest of which is not subject to federal
income and State of California personal income taxes.
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.
F-83
<PAGE> 137
- ------------------------------------------------------------------------------
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 on
investments. Realized gains and losses from security transactions are determined
on an identified cost basis. For callable bonds purchased at a premium, the
excess of the purchase price over the call value is amortized against interest
income through the call date. If the call provision is not exercised, any
remaining premium is amortized through the final maturity date.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, 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.
All distributions paid by the Schwab California Short/Intermediate Tax-Free Bond
Fund and Schwab California Long-Term Tax-Free Bond Fund during the year ended
August 31, 1996, qualify as exempt interest dividends for federal tax purposes.
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized gain for the Schwab California Short/Intermediate Tax-Free Bond
Fund aggregated $224,000, of which $363,000 related to appreciated securities
and $139,000 related to depreciated
F-84
<PAGE> 138
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
securities, and net unrealized gain for the Schwab California Long-Term Tax-Free
Bond Fund aggregated $1,933,000, of which $2,662,000 related to appreciated
securities and $729,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. Under this agreement, the Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund incurred investment advisory and administration fees of $175,000 and
$401,000, 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 California Short/Intermediate
Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund incurred
transfer agency and shareholder service fees of $107,000, and $246,000,
respectively, before Schwab reduced its fees (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 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 $10,000
related to the Trust's unaffiliated trustees.
F-85
<PAGE> 139
- ------------------------------------------------------------------------------
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees 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 reduced by the
Investment Manager was $57,000 and $104,000 for the Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund, respectively, and the total of such fees reduced by Schwab was
$107,000 and $219,000 for the Schwab California Short/Intermediate Tax-Free Bond
Fund and the Schwab California Long-Term Tax-Free 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 California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------- -------------------
<S> <C> <C>
Purchases $13,425 $40,919
Proceeds of sales and
maturities $ 8,224 $33,408
</TABLE>
F-86
<PAGE> 140
- ------------------------------------------------------------------------------
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 California Short/Intermediate
Tax-Free 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 $ 10.06 $ 9.89 $ 10.13 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income 0.43 0.42 0.37 0.13
Net realized and unrealized gain
(loss) on investments (0.02) 0.17 (0.24) 0.13
------- ------- ------- --------
Total from investment operations 0.41 0.59 0.13 0.26
Less distributions
- ------------------
Dividends from
net investment income (0.43) (0.42) (0.37) (0.13)
Distributions from realized
gain on investments -- -- -- --
------- ------- ------- --------
Total distributions (0.43) (0.42) (0.37) (0.13)
------- ------- ------- --------
Net asset value at end of period $ 10.04 $ 10.06 $ 9.89 $ 10.13
======= ======= ======= ========
Total return (%) 4.11 6.17 1.29 2.57
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $45,788 $40,639 $48,649 $ 44,545
Ratio of expenses to
average net assets (%) 0.49 0.50 0.48 0.45*
Ratio of net investment income to
average net assets (%) 4.23 4.29 3.69 3.49*
Portfolio turnover rate (%) 20 62 35 0
- ---------------
Ratio of expenses to average net
assets prior to reduced fees and
absorbed expenses (%)+ 0.87 0.84 0.86 1.25*
Ratio of net investment income to
average net assets prior to
reduced fees and absorbed
expenses (%)+ 3.85 3.95 3.31 2.69*
</TABLE>
++ For the period April 21, 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
F-87
<PAGE> 141
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Long-Term Tax-Free Bond Fund
-------------------------------------------------------------
Eight months
ended Period ended
Year ended August 31, August 31, December 31,
1996 1995 1994 1993 1992++
-------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.53 $ 10.40 $ 11.26 $ 10.58 $ 10.00
Income from investment
- ----------------------
operations
Net investment income 0.57 0.56 0.56 0.38 0.51
Net realized and unrealized
gain (loss) on investments 0.10 0.13 (0.74) 0.68 0.58
-------- ------- -------- --------- -------
Total from investment
operations 0.67 0.69 (0.18) 1.06 1.09
Less distributions
- ------------------
Dividends from
net investment income (0.57) (0.56) (0.56) (0.38) (0.51)
Distributions from realized
gain on investments -- -- (.12) -- --
-------- ------- -------- --------- -------
Total distributions (0.57) (0.56) (0.68) (0.38) (0.51)
-------- ------- -------- --------- -------
Net asset value at end of period $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58
======== ======= ======== ========= =======
Total return (%) 6.43 6.98 (1.70) 10.13 11.10
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000s) $101,616 $90,045 $106,432 $ 138,067 $72,969
Ratio of expenses to
average net assets (%) 0.49 0.58 0.60 0.60* 0.45*
Ratio of net investment income
to average net assets (%) 5.30 5.54 5.12 5.18* 5.72*
Portfolio turnover rate (%) 36 46 48 47 124
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees
and absorbed expenses (%)+ 0.82 0.81 0.80 0.87* 1.05*
Ratio of net investment income
to average net assets prior
to reduced fees and absorbed
expenses (%)+ 4.97 5.31 4.92 4.91* 5.12*
</TABLE>
++ For the period February 24, 1992 (commencement of operations) to December 31,
1992.
+ 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
F-88
<PAGE> 142
- ------------------------------------------------------------------------------
To the Trustees and Shareholders of
the Schwab California Short/Intermediate Tax-Free Bond Fund and
Schwab California Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Schwab California
Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term
Tax-Free Bond Fund (two series constituting part of Schwab Investments,
hereafter referred to as the "Trust") at August 31, 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 the 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.
/s/ Price Waterhouse LLP
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PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
F-89
