<PAGE> 1
SCHWABFUNDS
SCHWAB
TAX-FREE
BOND FUNDS
Annual Report
August 31, 1997
<PAGE> 2
Dear Shareholder,
[PHOTO OF With the support of investors like you, SchwabFunds(R)
CHARLES R. continues to be among the largest and fastest-growing mutual
SCHWAB] fund families in the nation. Charles Schwab Investment
Management, Inc. (CSIM) now manages over $50 billion in assets
for more than 2.5 million SchwabFunds shareholders and offers
31 funds spanning a spectrum of financial markets and
investing styles.
ENHANCING CHANNELS OF COMMUNICATION
We believe that an important part of serving your needs is keeping you informed
about your investments. This report, for example, contains performance and
financial data on your fund as well as an analysis of market trends during the
reporting period and the impact of those trends on our portfolio management
strategy. This is just one way we hope to keep communication open between you
and the people managing your investments.
In addition, if you're among the millions of people exploring the Internet, I
encourage you to visit our Web site at www.schwab.com/schwabfunds, where you'll
find a wealth of information -- including monthly commentaries on market
conditions from our SchwabFunds portfolio managers.
NEW INVESTMENT OPPORTUNITIES
In our ongoing commitment to provide additional investment opportunities, we
recently introduced Schwab OneSource Portfolios - Small Company Fund -- a
professionally managed portfolio of small company mutual funds in one convenient
investment. If you're looking for an easy, cost-effective way to tap into the
growth potential of small companies, this fund may be an appropriate investment
for you. For a free prospectus which contains more information including fees
and expenses, please call our toll-free line at 1-800-435-4000. Please be sure
to read the prospectus before investing.
Thank you for placing your trust in SchwabFunds. We will continue to explore new
strategies to help meet your investment needs and to provide you with timely
information on SchwabFunds.
/s/ Charles R. Schwab
Charles R. Schwab
<PAGE> 3
Make Your
Money Work
Harder!
Use this envelope to easily add
to your Schwab Bond Fund.
Charles Schwab
<PAGE> 4
WE'VE MADE IT EASIER FOR YOU! TAKE ADVANTAGE OF THIS OPPORTUNITY TO ADD TO YOUR
SCHWAB BOND FUND INVESTMENT.
Now, you can easily add to your investment by using this convenient Schwab
investment coupon. You can also have money transferred to your bond fund
directly from your bank account or payroll check using Schwab's free Automatic
Investment Plan (AIP). 1 If you'd like more information on AIP, just check the
appropriate box on the coupon. We'll send you everything you need to get
started.
DON'T DELAY. USE THIS CONVENIENT INVESTMENT ENVELOPE AND SEND YOUR CHECK TODAY!
1. The Automatic Investment Plan does not ensure profit or protect against
loss in declining markets.
- ------------------------------------------------------------------------------
PLEASE DETACH HERE.
SCHWAB BOND FUND
INVESTMENT COUPON
- ------------------------------------------------------------------------------
Please enclose your check and this completed investment coupon in the attached
postage-paid envelope.
- ---------------------------------------------
NAME
$
- ---------------------------------------------
AMOUNT OF INVESTMENT*
X
- ---------------------------------------------
SIGNATURE
/ / Check here if you would like more investment coupons for future use.
/ / Check here if you would like more information on Schwab's Automatic
Investment Plan (AIP).
*THIS ENVELOPE MAY NOT BE USED FOR INITIAL INVESTMENTS. SUBSEQUENT INVESTMENT
MINIMUM IS $100.
(c) 1997 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE.
Printed on recycled paper. TF5009(9/97) CRS 20155
- ---------------------------------------------
SCHWAB ACCOUNT NUMBER
PLEASE INDICATE INTO WHICH SCHWAB BOND FUND YOUR MONEY SHOULD BE INVESTED.
THIS ENVELOPE MAY ONLY BE USED FOR PURCHASES OF FUNDS WHICH YOU ALREADY OWN AND
FOR WHICH YOU HAVE A CURRENT PROSPECTUS.
/ / Schwab Long-Term Government Bond Fund
/ / Schwab Short/Intermediate Government Bond Fund
/ / Schwab California Long-Term Tax-Free Bond Fund
/ / Schwab California Short/Intermediate Tax-Free Bond Fund
/ / Schwab Long-Term Tax-Free Fund
/ / Schwab Short/Intermediate Tax-Free Fund
IF NO FUND IS INDICATED, YOUR INVESTMENT WILL GO INTO THE SWEEP MONEY FUND
YOU'VE DESIGNATED IN YOUR SCHWAB ACCOUNT.
(Lift here for more information.)
<PAGE> 5
CHARLES SCHWAB
JUST FOLLOW THESE EASY STEPS:
1. Fill out the Schwab investment coupon completely, including your name,
account number, signature and the amount of your check. Please use a separate
coupon for each account.
2. Make your check payable to CHARLES SCHWAB & CO., INC., and enclose your check
with the completed coupon in this postage-paid envelope.
3. Then just drop your Schwab Bond Fund investment envelope in the mail
today--and start putting your money to work! If you have any questions, don't
hesitate to call your local Schwab office or 1-800-435-4000.
THIS ENVELOPE MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT SCHWAB BOND FUND
PROSPECTUS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
<PAGE> 6
Attn: Dept. AIP 333-4
- ----------------
NO POSTAGE
NECESSARY IF
MAILED IN THE
UNITED STATES
- ----------------
- -----------------------------------------------------------
BUSINESS REPLY MAIL
FIRST-CLASS MAIL PERMIT NO. 18125 SAN FRANCISCO, CA
- -----------------------------------------------------------
POSTAGE WILL BE PAID BY ADDRESSEE
CHARLES SCHWAB & CO., INC
PO BOX 7778
SAN FRANCISCO CA 94120-9419
<PAGE> 7
TABLE OF CONTENTS
A WORD FROM SCHWABFUNDS(R).....................................................2
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND...................................4
SCHWAB LONG-TERM TAX-FREE BOND FUND............................................6
THE PORTFOLIO MANAGEMENT TEAM..................................................8
MARKET OVERVIEW................................................................9
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM....................................17
FINANCIAL STATEMENTS AND NOTES................................................20
1
<PAGE> 8
A WORD FROM SCHWABFUNDS(R)
We are pleased to bring you the annual report for Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund (the Funds) for the
year ended August 31, 1997.
During the reporting period, the Funds achieved their primary objectives of
providing a high level of current income exempt from federal income taxes,
consistent with preservation of capital. 1 The chart below shows the income
dividends on a per share basis paid by the Funds during each fiscal year or
period since inception.
Income Dividends per Share
<TABLE>
<CAPTION>
Label A B
Label Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
<S> <C> <C> <C>
1 1992 0 0.17
2 1993 0.13 0.36
3 1994 0.37 0.52
4 1995 0.4 0.53
5 1996 0.41 0.52
6 1997 0.41 0.53
</TABLE>
Fiscal Year
[ ] Schwab Short/Intermediate Tax-Free Bond Fund
[ ] Schwab Long-Term Tax-Free Bond Fund
* Period from Inception (9/11/92) through 12/31/92.
** Period from Inception (4/21/93) through 8/31/93 for Schwab
Short/Intermediate Tax-Free Bond Fund and for the eight-month period ended
8/31/93 for Schwab Long-Term Tax-Free Bond Fund.
1 Income from the Funds may be subject to state and local taxes and to federal
Alternative Minimum Tax (AMT).
2
<PAGE> 9
TAXABLE EQUIVALENT YIELD
The taxable equivalent yield represents the pre-tax yield a taxable investment
would have to pay to equal the tax-exempt yield of an investor's tax bracket and
may be helpful in evaluating the performance of a tax-exempt investment. The
table below shows the Funds' 30-day SEC yields as of 8/31/97 and the taxable
equivalent yields, 2 assuming a maximum federal income tax rate of 39.6%.
Actual tax rates may vary.
<TABLE>
<CAPTION>
30-Day SEC Taxable Equivalent
Yield 30-Day SEC Yield
<S> <C> <C>
Schwab Short/Intermediate
Tax-Free Bond Fund 3.89% 6.44%
Schwab Long-Term
Tax-Free Bond Fund 5.00% 8.28%
</TABLE>
2 The Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least December 31, 1997 that
maximum total operating expenses will not exceed 0.49%. Without fee waivers and
guarantees, the Funds' yields would have been lower.
3
<PAGE> 10
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
The Fund invests primarily in debt securities issued by or on behalf of the
states, territories, and possessions of the U.S. and the District of Columbia
and their political subdivisions, agencies, and instrumentalities. Under normal
market conditions, the Fund seeks to maintain a dollar weighted average
portfolio maturity between two and five years.
The chart below presents the Fund's portfolio as of 8/31/97 based on published
ratings from Standard & Poor's Ratings Group and/or Moody's Investor Services,
which are recognized rating services. Categories reflect the higher published
ratings for securities rated differently by the two agencies and percentages are
dollar weighted. This information is not necessarily indicative of the Fund's
future holdings.
[PIE CHART]
<TABLE>
<CAPTION>
Label A
<S> <C> <C>
Label
1 AAA 64%
2 AA 27%
3 A 5%
4 BBB 2%
5 Short-Term Securities 2%
</TABLE>
The chart on the following page compares the growth of a $10,000 investment in
the Fund, made at inception, with a similar investment in the Lehman Brothers
3-Year Municipal Bond Index (Lehman 3-Year Muni Index). THIS INFORMATION IS
HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
4
<PAGE> 11
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND AND LEHMAN 3-YEAR MUNI INDEX
[ ] Schwab Short/Intermediate Tax-Free Bond Fund
[ ] Lehman 3-Year Muni Index
<TABLE>
<CAPTION>
Label A B
----- --- ---
Label SCHWAB SHORT/INTERMEDIATE LEHMAN 3-YEAR
TAX-FREE BOND FUND MUNI INDEX
- ----- ------------------------- -------------
<S> <C> <C> <C>
1 Apr 21, 93 10000 10000
2 Apr-93 9990 9993
3 May-93 10038 10020
4 Jun-93 10129 10085
5 Jul-93 10151 10090
6 Aug-93 10283 10184
7 Sep-93 10344 10228
8 Oct-93 10366 10250
9 Nov-93 10326 10237
10 Dec-93 10462 10344
11 Jan-94 10567 10428
12 Feb-94 10412 10331
13 Mar-94 10218 10206
14 Apr-94 10280 10267
15 May-94 10323 10315
16 Jun-94 10312 10318
17 Jul-94 10407 10403
18 Aug-94 10429 10440
19 Sep-94 10377 10414
20 Oct-94 10317 10389
21 Nov-94 10245 10370
22 Dec-94 10346 10415
23 Jan-95 10445 10501
24 Feb-95 10563 10612
25 Mar-95 10655 10707
26 Apr-95 10691 10743
27 May-95 10881 10908
28 Jun-95 10884 10934
29 Jul-95 10987 11050
30 Aug-95 11079 11136
31 Sep-95 11115 11167
32 Oct-95 11175 11221
33 Nov-95 11255 11293
34 Dec-95 11305 11340
35 Jan-96 11383 11429
36 Feb-96 11364 11431
37 Mar-96 11313 11403
38 Apr-96 11306 11417
39 May-96 11312 11427
40 Jun-96 11371 11496
41 Jul-96 11443 11559
42 Aug-96 11447 11577
43 Sep-96 11519 11647
44 Oct-96 11605 11729
45 Nov-96 11712 11838
46 Dec-96 11705 11844
47 Jan-97 11742 11896
48 Feb-97 11801 11954
49 Mar-97 11737 11892
50 Apr-97 11776 11943
51 May-97 11876 12040
52 Jun-97 11938 12111
53 Jul-97 12096 12255
54 Aug-97 12065 12230
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 8/31/97
<TABLE>
<CAPTION>
1 Yr. Since 30-Day Value of a
Inception 3 SEC Yield $10,000 Investment
<S> <C> <C> <C> <C>
Schwab Short/Intermediate
Tax-Free Bond Fund 4 5.40% 4.39% 3.89% $12,065
Lehman 3-Year
Muni Index 5.65% 4.72% -- $12,230
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 6/30/97
<TABLE>
<CAPTION>
1 Yr. Since 30-Day
Inception 3 SEC Yield
<S> <C> <C> <C>
Schwab Short/Intermediate
Tax-Free Bond Fund 4 4.99% 4.31% 3.96%
</TABLE>
3 Inception date was 4/21/93.
4 The Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least December 31, 1997 that
maximum total operating expenses will not exceed 0.49%. Without fee waivers and
guarantees, as of 8/31/97, the Fund's 30-day SEC yield and average annual
one-year and since inception total returns would have been 3.32%, 4.91%, and
3.92%, respectively. Without fee waivers and guarantees, as of 6/30/97, the
Fund's 30-day SEC yield and average annual one-year and since inception total
returns would have been 3.38%, 4.51%, and 3.84%, respectively.
5
<PAGE> 12
SCHWAB LONG-TERM TAX-FREE BOND FUND
The Fund invests primarily in debt securities issued by or on behalf of the
states, territories, and possessions of the U.S. and the District of Columbia
and their political subdivisions, agencies, and instrumentalities. Under normal
market conditions, the Fund seeks to maintain a dollar weighted average
portfolio maturity of ten years or longer.
The chart below presents the Fund's portfolio as of 8/31/97 based on published
ratings from Standard & Poor's Ratings Group and/or Moody's Investor Services,
which are recognized rating services. Categories reflect the higher published
ratings for securities rated differently by the two agencies and percentages are
dollar weighted. This information is not necessarily indicative of the Fund's
future holdings.
[PIE CHART]
<TABLE>
<CAPTION>
Label Label A
<S> <C> <C>
1 AAA 58%
2 AA 32%
3 A 9%
4 Short-Term Securities 1%
</TABLE>
The chart on the following page compares the growth of a $10,000 investment in
the Fund, made at inception, with a similar investment in the Lehman Brothers
General Obligation Municipal Bond Index (Lehman Muni Bond Index). THIS
INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
6
<PAGE> 13
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN SCHWAB LONG-TERM TAX-FREE
BOND FUND AND LEHMAN MUNI BOND INDEX
[ ] Schwab Long-Term Tax-Free Bond Fund
[ ] Lehman Muni Bond Index
<TABLE>
<CAPTION>
Label A B
Label Schwab Long-Term Lehman Muni Bond
Tax-Free Bond Fund Index
<S> <C> <C> <C>
1 Sep 11, 92 10000 10000
2 Sep-92 9867 9923
3 Oct-92 9515 9826
4 Nov-92 9912 10002
5 Dec-92 10092 10104
6 Jan-93 10240 10221
7 Feb-93 10682 10591
8 Mar-93 10484 10479
9 Apr-93 10632 10585
10 May-93 10690 10644
11 Jun-93 10883 10822
12 Jul-93 10879 10836
13 Aug-93 11157 11062
14 Sep-93 11298 11188
15 Oct-93 11315 11209
16 Nov-93 11201 11111
17 Dec-93 11465 11345
18 Jan-94 11588 11475
19 Feb-94 11274 11177
20 Mar-94 10791 10722
21 Apr-94 10858 10813
22 May-94 10970 10907
23 Jun-94 10870 10840
24 Jul-94 11085 11044
25 Aug-94 11109 11083
26 Sep-94 10921 10920
27 Oct-94 10657 10726
28 Nov-94 10381 10532
29 Dec-94 10658 10764
30 Jan-95 11050 11072
31 Feb-95 11381 11394
32 Mar-95 11514 11524
33 Apr-95 11483 11538
34 May-95 11918 11906
35 Jun-95 11735 11802
36 Jul-95 11836 11914
37 Aug-95 11971 12065
38 Sep-95 12056 12141
39 Oct-95 12250 12317
40 Nov-95 12443 12521
41 Dec-95 12591 12642
42 Jan-96 12640 12738
43 Feb-96 12520 12651
44 Mar-96 12366 12489
45 Apr-96 12319 12454
46 May-96 12311 12449
47 Jun-96 12484 12585
48 Jul-96 12599 12699
49 Aug-96 12553 12697
50 Sep-96 12780 12875
51 Oct-96 12948 13020
52 Nov-96 13188 13258
53 Dec-96 13117 13203
54 Jan-97 13097 13228
55 Feb-97 13223 13350
56 Mar-97 12987 13172
57 Apr-97 13146 13283
58 May-97 13358 13482
59 Jun-97 13502 13626
60 Jul-97 13933 14004
61 Aug-97 13728 13872
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 8/31/97
<TABLE>
<CAPTION>
1 Yr. Since 30-Day Value of a
Inception 5 SEC Yield $10,000 Investment
<S> <C> <C> <C> <C>
Schwab Long-Term
Tax-Free Bond Fund 6 9.36% 6.58% 5.00% $13,728
Lehman Muni
Bond Index 9.25% 6.80% -- $13,872
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 6/30/97
<TABLE>
<CAPTION>
1 Yr. Since 30-Day
Inception 5 SEC Yield
<S> <C> <C> <C>
Schwab Long-Term
Tax-Free Bond Fund 6 8.15% 6.45% 5.11%
</TABLE>
5 Inception date was 9/11/92.
6 The Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least December 31, 1997 that
maximum total operating expenses will not exceed 0.49%. Without fee waivers and
guarantees, as of 8/31/97, the Fund's 30-day SEC yield and average annual
one-year and since inception total returns would have been 4.42%, 8.80%, and
6.01%, respectively. Without fee waivers and guarantees, as of 6/30/97, the
Fund's 30-day SEC yield and average annual one-year and since inception total
returns would have been 4.51%, 7.57%, and 5.88%, respectively.
7
<PAGE> 14
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD - Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of each Fund's portfolio. Steve joined
CSIM as Vice President and Portfolio Manager in April 1991 and was promoted to
his current position in August 1993. Prior to joining CSIM, Steve was Vice
President and Portfolio Manager at Federated Investors.
JOANNE LARKIN - Vice President and Senior Portfolio Manager, has had primary
responsibility for the day-to-day management of each Fund's portfolio since
their inception. Joanne joined CSIM as Portfolio Manager in February 1992 and
was promoted to her current position in December 1996. Prior to joining CSIM,
Joanne was Portfolio Manager for the Shearson Lehman California Municipal Bond
Fund and E.F. Hutton's Municipal Cash Reserve Management.
8
<PAGE> 15
MARKET OVERVIEW
Real GDP Growth Rate
<TABLE>
<CAPTION>
Label A
Label Real GDP
<S> <C> <C>
1 Q1 1990 0.041
2 Q2 1990 0.013
3 Q3 1990 -0.019
4 Q4 1990 -0.041
5 Q1 1991 0.022
6 Q2 1991 0.017
7 Q3 1991 0.01
8 Q4 1991 0.01
9 Q1 1992 0.047
10 Q2 1992 0.025
11 Q3 1992 0.03
12 Q4 1992 0.043
13 Q1 1993 -0.001
14 Q2 1993 0.019
15 Q3 1993 0.023
16 Q4 1993 0.048
17 Q1 1994 0.025
18 Q2 1994 0.049
19 Q3 1994 0.035
20 Q4 1994 0.03
21 Q1 1995 0.004
22 Q2 1995 0.007
23 Q3 1995 0.038
24 Q4 1995 0.003
25 Q1 1996 0.02
26 Q2 1996 0.047
27 Q3 1996 0.021
28 Q4 1996 0.038
29 Q1 1997 0.049
30 Q2 1997 0.033
</TABLE>
Source: Bloomberg L.P.
- - The economy, as measured by the growth of real GDP, continues to expand
at a healthy rate. The real GDP growth rate was 3.2% for the 1996
calendar year and 4.1% for the first six months of 1997.
- - The apparent strength of the economy and the tight labor markets (refer
to the next graph) continue to lead to speculation regarding the
potential impact on future inflation and whether more restrictive
Federal Reserve policy is imminent. The Federal Reserve has indicated
that it is "on alert" for signs of accelerating inflation caused by
either tight labor markets or by consumer spending fueled by a strong
stock market.
- - At the time of this writing, the economy appears poised for growth,
continuing the current economic expansion which began in 1991.
9
<PAGE> 16
U.S. Unemployment Rate
<TABLE>
<CAPTION>
Label A
Label Unemployment Rate
<S> <C> <C>
1 Jan-90 0.053
2 Feb-90 0.053
3 Mar-90 0.052
4 Apr-90 0.054
5 May-90 0.053
6 Jun-90 0.051
7 Jul-90 0.054
8 Aug-90 0.056
9 Sep-90 0.057
10 Oct-90 0.058
11 Nov-90 0.06
12 Dec-90 0.062
13 Jan-91 0.063
14 Feb-91 0.065
15 Mar-91 0.068
16 Apr-91 0.066
17 May-91 0.068
18 Jun-91 0.068
19 Jul-91 0.067
20 Aug-91 0.068
21 Sep-91 0.068
22 Oct-91 0.069
23 Nov-91 0.069
24 Dec-91 0.071
25 Jan-92 0.071
26 Feb-92 0.073
27 Mar-92 0.073
28 Apr-92 0.073
29 May-92 0.074
30 Jun-92 0.077
31 Jul-92 0.076
32 Aug-92 0.076
33 Sep-92 0.075
34 Oct-92 0.074
35 Nov-92 0.073
36 Dec-92 0.073
37 Jan-93 0.071
38 Feb-93 0.07
39 Mar-93 0.07
40 Apr-93 0.07
41 May-93 0.069
42 Jun-93 0.069
43 Jul-93 0.068
44 Aug-93 0.067
45 Sep-93 0.067
46 Oct-93 0.067
47 Nov-93 0.065
48 Dec-93 0.064
49 Jan-94 0.067
50 Feb-94 0.066
51 Mar-94 0.065
52 Apr-94 0.064
53 May-94 0.06
54 Jun-94 0.06
55 Jul-94 0.061
56 Aug-94 0.061
57 Sep-94 0.059
58 Oct-94 0.056
59 Nov-94 0.056
60 Dec-94 0.054
61 Jan-95 0.056
62 Feb-95 0.054
63 Mar-95 0.058
64 Apr-95 0.057
65 May-95 0.057
66 Jun-95 0.056
67 Jul-95 0.057
68 Aug-95 0.053
69 Sep-95 0.056
70 Oct-95 0.055
71 Nov-95 0.056
72 Dec-95 0.056
73 Jan-96 0.058
74 Feb-96 0.055
75 Mar-96 0.056
76 Apr-96 0.054
77 May-96 0.056
78 Jun-96 0.053
79 Jul-96 0.054
80 Aug-96 0.051
81 Sep-96 0.052
82 Oct-96 0.052
83 Nov-96 0.053
84 Dec-96 0.053
85 Jan-97 0.054
86 Feb-97 0.053
87 Mar-97 0.052
88 Apr-97 0.049
89 May-97 0.048
90 Jun-97 0.05
91 Jul-97 0.048
92 Aug-97 0.049
</TABLE>
Source: Bloomberg L.P.
- - The unemployment rate during 1996 remained near its lowest point for
the decade. This declining trend continued into 1997, with the May and
July rates of 4.8% representing the lowest rates since December 1973.
- - Low unemployment rates typically lead many economists to question
whether continued low levels of unemployment can persist without
generating inflationary pressures on wages and ultimately, prices.
10
<PAGE> 17
Measures of Inflation
[ ] Quarterly Employment Cost Index
[ ] Monthly Consumer Price Index
<TABLE>
<CAPTION>
Label A
Label Monthly Consumer
Price Index
<S> <C> <C>
1 Jan-90 0.052
2 Feb-90 0.053
3 Mar-90 0.052
4 Apr-90 0.047
5 May-90 0.044
6 Jun-90 0.047
7 Jul-90 0.048
8 Aug-90 0.056
9 Sep-90 0.062
10 Oct-90 0.063
11 Nov-90 0.063
12 Dec-90 0.061
13 Jan-91 0.057
14 Feb-91 0.053
15 Mar-91 0.049
16 Apr-91 0.049
17 May-91 0.05
18 Jun-91 0.047
19 Jul-91 0.044
20 Aug-91 0.038
21 Sep-91 0.034
22 Oct-91 0.029
23 Nov-91 0.03
24 Dec-91 0.031
25 Jan-92 0.026
26 Feb-92 0.028
27 Mar-92 0.032
28 Apr-92 0.032
29 May-92 0.03
30 Jun-92 0.031
31 Jul-92 0.032
32 Aug-92 0.031
33 Sep-92 0.03
34 Oct-92 0.032
35 Nov-92 0.03
36 Dec-92 0.029
37 Jan-93 0.033
38 Feb-93 0.032
39 Mar-93 0.031
40 Apr-93 0.032
41 May-93 0.032
42 Jun-93 0.03
43 Jul-93 0.028
44 Aug-93 0.028
45 Sep-93 0.027
46 Oct-93 0.028
47 Nov-93 0.027
48 Dec-93 0.027
49 Jan-94 0.025
50 Feb-94 0.025
51 Mar-94 0.025
52 Apr-94 0.024
53 May-94 0.023
54 Jun-94 0.025
55 Jul-94 0.028
56 Aug-94 0.029
57 Sep-94 0.03
58 Oct-94 0.026
59 Nov-94 0.027
60 Dec-94 0.027
61 Jan-95 0.028
62 Feb-95 0.029
63 Mar-95 0.029
64 Apr-95 0.031
65 May-95 0.032
66 Jun-95 0.03
67 Jul-95 0.028
68 Aug-95 0.026
69 Sep-95 0.025
70 Oct-95 0.028
71 Nov-95 0.026
72 Dec-95 0.025
73 Jan-96 0.027
74 Feb-96 0.027
75 Mar-96 0.028
76 Apr-96 0.029
77 May-96 0.029
78 Jun-96 0.028
79 Jul-96 0.03
80 Aug-96 0.029
81 Sep-96 0.03
82 Oct-96 0.03
83 Nov-96 0.033
84 Dec-96 0.033
85 Jan-97 0.03
86 Feb-97 0.03
87 Mar-97 0.028
88 Apr-97 0.025
89 May-97 0.022
90 Jun-97 0.023
91 Jul-97 0.022
92 Aug-97 0.022
</TABLE>
<TABLE>
<CAPTION>
Label A
Label Quarterly Employment
Cost Index
<S> <C> <C>
1 Jan-90 0.053
2 Feb-90 0.053
3 Mar-90 0.053
4 Apr-90 0.054
5 May-90 0.054
6 Jun-90 0.054
7 Jul-90 0.051
8 Aug-90 0.051
9 Sep-90 0.051
10 Oct-90 0.048
11 Nov-90 0.048
12 Dec-90 0.048
13 Jan-91 0.046
14 Feb-91 0.046
15 Mar-91 0.046
16 Apr-91 0.045
17 May-91 0.045
18 Jun-91 0.045
19 Jul-91 0.043
20 Aug-91 0.043
21 Sep-91 0.043
22 Oct-91 0.042
23 Nov-91 0.042
24 Dec-91 0.042
25 Jan-92 0.041
26 Feb-92 0.041
27 Mar-92 0.041
28 Apr-92 0.035
29 May-92 0.035
30 Jun-92 0.035
31 Jul-92 0.034
32 Aug-92 0.034
33 Sep-92 0.034
34 Oct-92 0.035
35 Nov-92 0.035
36 Dec-92 0.035
37 Jan-93 0.034
38 Feb-93 0.034
39 Mar-93 0.034
40 Apr-93 0.036
41 May-93 0.036
42 Jun-93 0.036
43 Jul-93 0.036
44 Aug-93 0.036
45 Sep-93 0.036
46 Oct-93 0.034
47 Nov-93 0.034
48 Dec-93 0.034
49 Jan-94 0.032
50 Feb-94 0.032
51 Mar-94 0.032
52 Apr-94 0.031
53 May-94 0.031
54 Jun-94 0.031
55 Jul-94 0.031
56 Aug-94 0.031
57 Sep-94 0.031
58 Oct-94 0.03
59 Nov-94 0.03
60 Dec-94 0.03
61 Jan-95 0.03
62 Feb-95 0.03
63 Mar-95 0.03
64 Apr-95 0.03
65 May-95 0.03
66 Jun-95 0.03
67 Jul-95 0.028
68 Aug-95 0.028
69 Sep-95 0.028
70 Oct-95 0.028
71 Nov-95 0.028
72 Dec-95 0.028
73 Jan-96 0.029
74 Feb-96 0.029
75 Mar-96 0.029
76 Apr-96 0.029
77 May-96 0.029
78 Jun-96 0.029
79 Jul-96 0.029
80 Aug-96 0.029
81 Sep-96 0.029
82 Oct-96 0.03
83 Nov-96 0.03
84 Dec-96 0.03
85 Jan-97 0.028
86 Feb-97 0.028
87 Mar-97 0.028
88 Apr-97 0.028
89 May-97 0.028
90 Jun-97 0.028
91 Jul-97 0.030
92 Aug-97 0.030
</TABLE>
Source: Bloomberg L.P.
- - Both the Employment Cost Index and Consumer Price Index (CPI) remained
in check throughout the first half of 1997, reflecting continued low
levels of inflation.
- - For the twelve months ended August 1997, the CPI rose 2.2%, the lowest
rate since February 1987. Its core rate (which excludes the more
volatile food and energy components) rose 2.3%, the lowest rate since
1965.
- - The Federal Reserve has indicated that the economy remains at risk to
inflation and that it is poised to act preemptively by raising interest
rates if necessary. The Federal Reserve did take action in March,
increasing the Federal Funds Rate by 0.25% to 5.50%, yet left interest
rates unchanged at the recent July 1997 Federal Open Market Committee
meeting.
11
<PAGE> 18
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<TABLE>
<CAPTION>
Label A B C D
- ------------------------------------------------------------------------------------------------------
Label S&P 500 Schwab Small-Cap Schwab International Lehman Brothers General
Index Index Index U.S. Gov't. Index
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 1 1 1 1
2 Sep-96 1.056 1.037 1.029 1.017
3 Oct-96 1.085 1.019 1.026 1.039
4 Nov-96 1.167 1.06 1.074 1.057
5 Dec-96 1.144 1.079 1.064 1.046
6 Jan-97 1.216 1.105 1.029 1.047
7 Feb-97 1.225 1.078 1.046 1.049
8 Mar-97 1.175 1.025 1.053 1.038
9 Apr-97 1.245 1.028 1.064 1.053
10 May-97 1.321 1.154 1.142 1.062
11 Jun-97 1.38 1.214 1.209 1.074
12 Jul-97 1.49 1.283 1.242 1.104
13 Aug-97 1.404 1.312 1.152 1.093
</TABLE>
[ ] Schwab Small-Cap Index(R) [ ] S&P 500(R) Index
[ ] Schwab International Index(R) [ ] Lehman Brothers General U.S. Gov't.
Index
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
are representative returns of specific market sectors during the reporting
period and do not reflect performance of any fund. Indices are unmanaged and,
unlike a fund, do not reflect the payment of advisory fees and other expenses
associated with an investment in a fund. Investors cannot invest in an index
directly.
- - Despite a 5.6% correction in August, large-cap domestic stocks, as
represented by the S&P 500 Index, continued to be the strongest
performing asset class, achieving a 40.6% return during the one-year
reporting period ended August 31, 1997.
- - As represented by the 31.2% return of the Schwab Small-Cap Index,
small-cap stocks also achieved very strong returns during the reporting
period, well in excess of their long-term averages.
- - International stocks, as represented by the Schwab International Index,
achieved a return of 15.2% for the reporting period, following a
correction of 7.2% during August which was led by Asian markets.
- - U.S. Government bonds, as represented by the Lehman Brothers General
U.S. Government Index, achieved a return of 9.3% for the one-year
reporting period.
12
<PAGE> 19
S&P 500(R) Price/Earnings Ratio
<TABLE>
<CAPTION>
Label A
Label S&P 500 Price/Earnings Ratio
<S> <C> <C>
1 Jan-90 14.37
2 Feb-90 14.21
3 Mar-90 14.77
4 Apr-90 14.82
5 May-90 15.84
6 Jun-90 16.66
7 Jul-90 16.65
8 Aug-90 15.57
9 Sep-90 14.9
10 Oct-90 14.36
11 Nov-90 14.59
12 Dec-90 15.19
13 Jan-91 14.95
14 Feb-91 16.82
15 Mar-91 17.48
16 Apr-91 17.85
17 May-91 17.92
18 Jun-91 17.96
19 Jul-91 18.07
20 Aug-91 19.72
21 Sep-91 19.88
22 Oct-91 19.92
23 Nov-91 21.02
24 Dec-91 21.85
25 Jan-92 23.35
26 Feb-92 23.83
27 Mar-92 25.45
28 Apr-92 25.51
29 May-92 25.71
30 Jun-92 25.08
31 Jul-92 25.61
32 Aug-92 25.5
33 Sep-92 24.37
34 Oct-92 23.94
35 Nov-92 24.08
36 Dec-92 24.01
37 Jan-93 24.2
38 Feb-93 24.25
39 Mar-93 24.22
40 Apr-93 23.2
41 May-93 23.21
42 Jun-93 22.58
43 Jul-93 22.52
44 Aug-93 23.02
45 Sep-93 23.74
46 Oct-93 23.97
47 Nov-93 22.55
48 Dec-93 23.55
49 Jan-94 22.98
50 Feb-94 21.17
51 Mar-94 20.34
52 Apr-94 20.1
53 May-94 20.16
54 Jun-94 19.76
55 Jul-94 18.64
56 Aug-94 18.9
57 Sep-94 18.26
58 Oct-94 17.55
59 Nov-94 16.58
60 Dec-94 16.98
61 Jan-95 16.23
62 Feb-95 16.2
63 Mar-95 16.5
64 Apr-95 16.02
65 May-95 16.43
66 Jun-95 16.82
67 Jul-95 16.55
68 Aug-95 16.18
69 Sep-95 16.86
70 Oct-95 16.18
71 Nov-95 17.14
72 Dec-95 17.41
73 Jan-96 18.11
74 Feb-96 18.56
75 Mar-96 18.94
76 Apr-96 19.16
77 May-96 19.48
78 Jun-96 19.3
79 Jul-96 18.31
80 Aug-96 18.62
81 Sep-96 19.75
82 Oct-96 19.6
83 Nov-96 21.05
84 Dec-96 20.7
85 Jan-97 20.55
86 Feb-97 20.98
87 Mar-97 19.87
88 Apr-97 20.24
89 May-97 21.43
90 Jun-97 22.45
91 Jul-97 23.92
92 Aug-97 22.64
</TABLE>
Source: Bloomberg L.P.
- - The price/earnings ratio for the S&P 500 was 22.6 at the close of the
reporting period, well above its 30-year average of 14.7.
- - Based on other traditional measures such as the price-to-book value
ratio or dividend yield, the U.S. stock market valuation, as measured
by the S&P 500, reached historical highs during the reporting period.
- - Although low inflation and interest rates, as well as strong flows into
mutual funds, have helped the U.S. equity markets reach such levels,
Federal Reserve Chairman Greenspan has warned that current stock market
values make sense only if the outlook for corporate earnings growth
remains positive, an assumption which should be widely debated by
market participants.
13
<PAGE> 20
30-Year and 5-Year Treasury Bond Yields
[ ] 30-Year Treasury Bond Yield
[ ] 5-Year Treasury Bond Yield
<TABLE>
<CAPTION>
LABEL A B
-----------------------------------------------------------------------
30-Year 5-Year
Label Treasury Treasury
Bond Yield Bond Yield
<S> <C> <C> <C>
1 Sep 6, 96 0.0711 0.067
--------------------------------------------------------------------
2 Sep 13, 96 0.0695 0.0647
--------------------------------------------------------------------
3 Sep 20, 96 0.0704 0.0662
--------------------------------------------------------------------
4 Sep 27, 96 0.0691 0.0644
--------------------------------------------------------------------
5 Oct 4, 96 0.0674 0.0621
--------------------------------------------------------------------
6 Oct 11, 96 0.0685 0.0628
--------------------------------------------------------------------
7 Oct 18, 96 0.068 0.0625
--------------------------------------------------------------------
8 Oct 25, 96 0.0682 0.0626
--------------------------------------------------------------------
9 Nov 1, 96 0.0668 0.0611
--------------------------------------------------------------------
10 Nov 8, 96 0.0651 0.0603
--------------------------------------------------------------------
11 Nov 15, 96 0.0646 0.0596
--------------------------------------------------------------------
12 Nov 22, 96 0.0644 0.0593
--------------------------------------------------------------------
13 Nov 29, 96 0.0635 0.0583
--------------------------------------------------------------------
14 Dec 6, 96 0.0651 0.0599
--------------------------------------------------------------------
15 Dec 13, 96 0.0657 0.0605
--------------------------------------------------------------------
16 Dec 20, 96 0.0661 0.0614
--------------------------------------------------------------------
17 Dec 27, 96 0.0656 0.0608
--------------------------------------------------------------------
18 Jan 3, 97 0.0673 0.0627
--------------------------------------------------------------------
19 Jan 10, 97 0.0685 0.0638
--------------------------------------------------------------------
20 Jan 17, 97 0.0682 0.0631
--------------------------------------------------------------------
21 Jan 24, 97 0.0689 0.0639
--------------------------------------------------------------------
22 Jan 31, 97 0.0679 0.0625
--------------------------------------------------------------------
23 Feb 7, 97 0.067 0.0615
--------------------------------------------------------------------
24 Feb 14, 97 0.0652 0.0606
--------------------------------------------------------------------
25 Feb 21, 97 0.0664 0.0616
--------------------------------------------------------------------
26 Feb 28, 97 0.068 0.0639
--------------------------------------------------------------------
27 Mar 7, 97 0.0681 0.0637
--------------------------------------------------------------------
28 Mar 14, 97 0.0694 0.0652
--------------------------------------------------------------------
29 Mar 21, 97 0.0697 0.0662
--------------------------------------------------------------------
30 Mar 28, 97 0.0709 0.0678
--------------------------------------------------------------------
31 Apr 4, 97 0.0712 0.0676
--------------------------------------------------------------------
32 Apr 11, 97 0.0717 0.0684
--------------------------------------------------------------------
33 Apr 18, 97 0.0705 0.0671
--------------------------------------------------------------------
34 Apr 25, 97 0.0714 0.0684
--------------------------------------------------------------------
35 May 2, 97 0.0687 0.0651
--------------------------------------------------------------------
36 May 9, 97 0.0689 0.0652
--------------------------------------------------------------------
37 May 16, 97 0.069 0.0655
--------------------------------------------------------------------
38 May 23, 97 0.0699 0.0658
--------------------------------------------------------------------
39 May 30, 97 0.0691 0.065
--------------------------------------------------------------------
40 Jun 6, 97 0.0677 0.0637
--------------------------------------------------------------------
41 Jun 13, 97 0.0672 0.0625
--------------------------------------------------------------------
42 Jun 20, 97 0.0666 0.0627
--------------------------------------------------------------------
43 Jun 27, 97 0.0674 0.0633
--------------------------------------------------------------------
44 Jul 4, 97 0.0663 0.0619
--------------------------------------------------------------------
45 Jul 11, 97 0.0653 0.0612
--------------------------------------------------------------------
46 Jul 18, 97 0.0653 0.0614
--------------------------------------------------------------------
47 Jul 25, 97 0.0645 0.0608
--------------------------------------------------------------------
48 Aug 1, 97 0.0645 0.0607
--------------------------------------------------------------------
49 Aug 8, 97 0.0664 0.0622
--------------------------------------------------------------------
50 Aug 15, 97 0.0655 0.0606
--------------------------------------------------------------------
51 Aug 22, 97 0.0665 0.0619
--------------------------------------------------------------------
52 Aug 29, 97 0.0661 0.0622
--------------------------------------------------------------------
</TABLE>
Source: Bloomberg L.P.
- - Although bond yields moved within a fairly narrow trading range
throughout most of the reporting period, they were heavily influenced
by reports indicating the relative strength of the economy.
- - Yields declined during the third and into the fourth quarter of 1996
following reports of weaker economic data and a slowing of the GDP
growth rate to 2.1% during the third quarter. The fourth quarter's
lower interest rates prompted renewed refinancing activity and consumer
spending, resulting in better employment growth, higher rates, and
stronger GDP growth through the first quarter of 1997.
- - Yields experienced another decline during the second quarter of 1997,
again in response to reports of weaker economic activity.
14
<PAGE> 21
30-YEAR AND 5-YEAR AAA GENERAL OBLIGATION (GO)
MUNICIPAL BOND YIELDS
Label A B
-------------- ---------------- ----------------
Label 30-Year AAA GO 5-Year AAA GO
Muni Bond Yields Muni Bond Yields
------- ---------------- ----------------
1 Sep 6, 96 0.0575 0.0458
2 Sep 13, 96 0.0564 0.0448
3 Sep 20, 96 0.0569 0.0454
4 Sep 27, 96 0.056 0.0445
5 Oct 4, 96 0.0547 0.044
6 Oct 11, 96 0.0555 0.0448
7 Oct 18, 96 0.0557 0.0449
8 Oct 25, 96 0.0562 0.0448
9 Nov 1, 96 0.0555 0.0441
10 Nov 8, 96 0.0549 0.0435
11 Nov 15, 96 0.0544 0.043
12 Nov 22, 96 0.0541 0.0425
13 Nov 29, 96 0.0532 0.0418
14 Dec 6, 96 0.054 0.0426
15 Dec 13, 96 0.0542 0.0428
16 Dec 20, 96 0.0542 0.0428
17 Dec 27, 96 0.0538 0.0424
18 Jan 3, 97 0.0544 0.043
19 Jan 10, 97 0.0555 0.0441
20 Jan 17, 97 0.0553 0.0443
21 Jan 24, 97 0.0554 0.0444
22 Jan 31, 97 0.0551 0.0441
23 Feb 7, 97 0.0545 0.0435
24 Feb 14, 97 0.0533 0.0423
25 Feb 21, 97 0.0539 0.0429
26 Feb 28, 97 0.0544 0.0434
27 Mar 7, 97 0.0547 0.0437
28 Mar 14, 97 0.055 0.044
29 Mar 21, 97 0.0557 0.0447
30 Mar 28, 97 0.0563 0.0458
31 Apr 4, 97 0.0566 0.0466
32 Apr 11, 97 0.0564 0.0464
33 Apr 18, 97 0.0562 0.0466
34 Apr 25, 97 0.0567 0.0475
35 May 2, 97 0.0556 0.0467
36 May 9, 97 0.0553 0.0464
37 May 16, 97 0.0549 0.046
38 May 23, 97 0.055 0.0461
39 May 30, 97 0.0547 0.046
40 Jun 6, 97 0.054 0.0453
41 Jun 13, 97 0.0529 0.0437
42 Jun 20, 97 0.0527 0.0435
43 Jun 27, 97 0.0533 0.0436
44 Jul 4, 97 0.0529 0.0432
45 Jul 11, 97 0.0523 0.0426
46 Jul 18, 97 0.0517 0.042
47 Jul 25, 97 0.0511 0.0414
48 Aug 1, 97 0.0514 0.0418
49 Aug 8, 97 0.0522 0.0426
50 Aug 15, 97 0.0524 0.0428
51 Aug 22, 97 0.0529 0.0433
52 Aug 29, 97 0.053 0.0434
[ ] 30-Year AAA GO Muni Bond Yields [ ] 5-Year AAA GO Muni Bond Yields
Source: Bloomberg L.P.
- - Municipal bond yields experienced a pattern similar to Treasury bond
yields and finished the reporting period approximately 0.25% to 0.45%
lower than at the start of the period.
15
<PAGE> 22
RATIO OF MUNICIPAL BOND YIELDS TO TREASURY BOND YIELDS
<TABLE>
<CAPTION>
Label A B
- -------------------------------------------------------------
Label 30-Year 5-Year
Bond Yields Bond Yields
- -------------------------------------------------------------
<S> <C> <C> <C>
1 Sep 6, 96 0.809 0.684
2 Sep 13, 96 0.812 0.692
3 Sep 20, 96 0.808 0.686
4 Sep 27, 96 0.811 0.692
5 Oct 4, 96 0.811 0.709
6 Oct 11, 96 0.811 0.714
7 Oct 18, 96 0.819 0.718
8 Oct 25, 96 0.825 0.716
9 Nov 1, 96 0.831 0.722
10 Nov 8, 96 0.844 0.722
11 Nov 15, 96 0.842 0.722
12 Nov 22, 96 0.841 0.717
13 Nov 29, 96 0.838 0.717
14 Dec 6, 96 0.829 0.711
15 Dec 13, 96 0.825 0.707
16 Dec 20, 96 0.82 0.697
17 Dec 27, 96 0.82 0.697
18 Jan 3, 97 0.808 0.686
19 Jan 10, 97 0.811 0.691
20 Jan 17, 97 0.811 0.703
21 Jan 24, 97 0.804 0.695
22 Jan 31, 97 0.812 0.706
23 Feb 7, 97 0.813 0.708
24 Feb 14, 97 0.817 0.698
25 Feb 21, 97 0.811 0.696
26 Feb 28, 97 0.8 0.68
27 Mar 7, 97 0.803 0.686
28 Mar 14, 97 0.792 0.675
29 Mar 21, 97 0.799 0.675
30 Mar 28, 97 0.794 0.675
31 Apr 4, 97 0.794 0.69
32 Apr 11, 97 0.787 0.678
33 Apr 18, 97 0.797 0.695
34 Apr 25, 97 0.794 0.695
35 May 2, 97 0.809 0.717
36 May 9, 97 0.802 0.712
37 May 16, 97 0.796 0.703
38 May 23, 97 0.787 0.7
39 May 30, 97 0.792 0.708
40 Jun 6, 97 0.797 0.711
41 Jun 13, 97 0.787 0.699
42 Jun 20, 97 0.791 0.694
43 Jun 27, 97 0.791 0.689
44 Jul 4, 97 0.798 0.697
45 Jul 11, 97 0.801 0.697
46 Jul 18, 97 0.792 0.684
47 Jul 25, 97 0.792 0.681
48 Aug 1, 97 0.797 0.689
49 Aug 8, 97 0.787 0.685
50 Aug 15, 97 0.8 0.706
51 Aug 22, 97 0.796 0.699
52 Aug 29, 97 0.802 0.698
</TABLE>
[ ] 30-Year Bond Yields [ ] 5-Year Bond Yields
Source: Bloomberg L.P.
- - An upward slope in these lines indicates that municipal yields are
rising relative to Treasury yields and that municipal bond values are
falling (or not rising as fast) relative to Treasury values. A downward
slope indicates the reverse. The reason for the yield differential of
approximately 10% between the long-term and short-term ratios is that
the holders of long-term tax-exempt bonds demand higher yields to
compensate for the increased credit risk associated with holding any
long-term bond not backed by the U.S. Government.
- - Although impacted by seasonal supply and demand conditions, the
relationship between five-year Treasury and municipal bond yields
remained fairly constant during the reporting period. Likewise, the
ratio between thirty-year municipal bond and Treasury bond yields
remained within a fairly narrow range, and finished out the reporting
period with slightly lower municipal yields relative to those of
Treasuries.
16
<PAGE> 23
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q. HOW WERE THE FUNDS MANAGED DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE
TO THE PORTFOLIO?
A. We have continued to maintain portfolios of high-quality securities
(primarily AAA and AA). In the current market environment, we believe this is an
appropriate strategy for the Funds since there is very little yield advantage
associated with lower-rated securities -- we simply do not believe investors are
being adequately compensated for the higher credit risk. In both Funds, we
continue to execute a cautious strategy, carefully watching economic indicators
and monitoring Federal Reserve Bank communications regarding the target level
for short-term interest rates.
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
Reflecting the uncertainty of future movements in interest rates, we have
maintained the Fund's weighted average maturity (WAM) in a range comparable to
those of other funds with similar investment objectives. During the reporting
period, the Fund's WAM ranged from approximately 3.1 to 3.8 years. As of the end
of the reporting period, the Fund's WAM was 3.46 years, down slightly from 3.75
years at the beginning of the period.
SCHWAB LONG-TERM TAX-FREE BOND FUND
The Fund maintained its WAM within a range from approximately 17 to 20 years. In
early December, we extended the Fund's WAM from approximately 18 years to
approximately 19.25 years reflecting our assessment that municipal securities
were competitively priced at that time. Although the Fund has extended its
maturity beyond this range in the past, the yield curve is currently very flat
beyond 20 years, indicating that there is very little yield advantage associated
with the longer maturities. Again, we do not believe investors are being
adequately rewarded for the additional interest rate risk. The Fund's WAM at the
end of the period was 19.96 years, down slightly from 20.25 years at the
beginning of the period.
17
<PAGE> 24
Q. HOW DO THE SCHWAB TAX-FREE BOND FUNDS FIT INTO AN ASSET ALLOCATION PLAN?
A. The Schwab Tax-Free Bond Funds can be used to fulfill all or a portion of the
bond component of an asset allocation plan. Bond funds can be an important
element in an asset allocation plan because of their ability to generate income
and to help reduce overall portfolio volatility. The selection of a taxable or
tax-exempt bond fund should be a function of whether you plan to hold the fund
in a tax-deferred account (such as an IRA or 401(k) account) or not; and if not,
a function of your marginal tax bracket. Under most market conditions,
tax-exempt investments held outside of a tax-deferred account are generally more
attractive to higher tax bracket investors.
Short/intermediate bond funds historically have offered greater price stability
in exchange for lower and somewhat more volatile yields. Conversely, funds with
longer WAMs historically have paid higher and somewhat more stable yields with
correspondingly greater price volatility. The selection of the most appropriate
fund will depend on your own degree of risk tolerance, need for income, and time
horizon. To position your portfolio to respond to fluctuating interest rates or
to create a balanced combination of maturities, you may want to consider
investing in both Schwab Tax-Free Bond Funds.
Q. SINCE THE STOCK MARKET HAS ACHIEVED RECORD HIGHS, IS IT TIME TO THINK ABOUT
INCREASING MY ALLOCATION TO BONDS?
A. Whenever there has been a significant divergence between returns of asset
classes, it is prudent to review your portfolio asset allocation. For the
three-year period ended 8/31/97, total returns on large-cap domestic stocks far
exceeded those of domestic bonds. For example, Schwab 1000 Fund(R), a large-cap
domestic equity portfolio, produced an average annual total return of 25.28% for
the three-year period ended 8/31/97 while Schwab Long-Term Government Bond Fund
returned 8.73% over the same period. 7 This divergence between asset class
returns can affect portfolio asset allocation over time.
7 TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The
Investment Manager and Schwab waived a portion of both Funds' fees during the
period. Without the waiver, each Fund's total return would have been lower.
18
<PAGE> 25
As shown below, if an investor had a hypothetical asset allocation of 60% stocks
and 40% bonds (investing in just these two funds) at the beginning of the
three-year period, and reinvested all fund distributions, the asset allocation
mix would have shifted to 70% stocks and 30% bonds by the end of the period - a
significant shift from the investor's original strategy caused by the variance
in returns of stocks and bonds. 8
<TABLE>
<CAPTION>
8/31/94 Portfolio Three-Year 8/31/97 Portfolio
Value Allocation Growth Value Allocation
<S> <C> <C> <C> <C> <C>
Schwab 1000 Fund(R) $6,000 60% $5,798 $11,798 70%
Schwab Long-Term
Government Bond Fund $4,000 40% $1,142 $5,142 30%
Total Portfolio Value $10,000 100% $6,940 $16,940 100%
</TABLE>
Rather than trying to time markets, we believe investors should focus on their
own risk profiles and income needs to determine the most appropriate level of
bonds in their portfolios. In addition to providing income, bonds have
performance characteristics which may make them an attractive element of a
well-diversified investment portfolio. Since bond returns have historically not
been well correlated with stock returns, combining bonds in a portfolio with
other asset classes can be an effective tool to help reduce overall portfolio
volatility. 9
8 Note that these are hypothetical asset allocations only.
9 For the 20-year period ended 12/31/96, the correlation of large-cap stock
returns and government bond returns has been 0.37. Source: Symphony Asset
Management.
19
<PAGE> 26
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 8/31/97 as of 8/31/96 Reporting
(000s) (000s) Period
- -----------------------------------------------
<S> <C> <C>
$54,397 $54,132 0.5%
- -----------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1997
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- ---------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months... $ 900 1.7% 1.7%
7 - 36 Months... 19,076 35.5 37.2
37 - 60 Months... 23,153 43.1 80.3
Over 60 Months... 10,554 19.7 100.0%
------- -------
$53,683 100.0%
======= =======
Average Weighted Maturity--3.46 Years
</TABLE>
20
<PAGE> 27
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 8/31/97 as of 8/31/96 Reporting
(000s) (000s) Period
- -----------------------------------------------
<S> <C> <C>
$46,767 $43,672 7.1%
- -----------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1997
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- ---------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 416 0.9% 0.9%
2 - 20 Years 29,266 63.3 64.2
21 - 30 Years 12,742 27.5 91.7
Over 30 Years 3,830 8.3 100.0%
------- ---------
$46,254 100.0%
======== =======
Average Weighted Maturity--19.96 Years
</TABLE>
21
<PAGE> 28
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--98.3%(A)
ALABAMA--2.0 %
Birmingham, Alabama Special Care Facilities
Finance Authority Revenue Bonds (Daughters of
Charity National Health System--St. Vincents
Hospital & Providence) Series 1995 (Aa2 AA)
7.00%, 11/01/01 $1,000 $ 1,094
-------
ALASKA--2.2 %
Anchorage, Alaska Refunding School Bonds Series
1993A / (MBIA Insurance) (Aaa AAA)
5.10%, 08/01/99 1,145 1,162
-------
ARIZONA--8.2 %
Maricopa County, Arizona Unified School District
No. 93 (Cave Creek Project) Series
1997-A / (FGIC Insurance) (Aaa AAA)
5.00%, 07/01/03 2,325 2,384
Phoenix, Arizona Civic Improvement Corp.
Wastewater Systems Lease Revenue Bonds Series
1993 (Aa3 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 1,046
-------
4,451
-------
CONNECTICUT--3.9 %
Connecticut State Special Tax Obligation
Refunding Bonds (Transportation Infrastructure
Purposes) Series 1995C / (FGIC Insurance) (Aaa
AAA)
5.50%, 10/01/00 2,000 2,073
-------
FLORIDA--2.5 %
Orange County, Florida Certificates of
Participation Series A / (MBIA Insurance)
(Aaa-)
4.80%, 08/01/02 1,300 1,316
-------
ILLINOIS--2.2 %
Illinois Health Facility Authority Revenue Bonds
(OSF Healthcare System) Series 1993 (A1 A+)
5.13%, 11/15/00 1,145 1,164
-------
</TABLE>
22
<PAGE> 29
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
INDIANA--2.0 %
Monroe County, Indiana Industrial Hospital
Authority Revenue Refunding Bonds (Bloomington
Hospital Project) / (MBIA Insurance) (Aaa -)
4.60%, 05/01/04 $1,105 $ 1,090
-------
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 2,230
-------
KENTUCKY--5.1 %
Kentucky Housing Corp. Housing Revenue Bonds
Series 1993B / (Multiple Credit Enhancements)
(Aaa AAA)
4.45%, 07/01/00 1,000 1,008
Kentucky State Property & Buildings Commission
Revenue Refunding Bonds (Project 55) (A A+)
4.15%, 09/01/99 1,735 1,732
-------
2,740
-------
MARYLAND--5.8 %
Washington, Maryland Suburban Sanitation District
Sewage Disposal Refunding Bonds (Montgomery &
Prince George Counties) (Aa1 AA)
6.00%, 11/01/99 3,000 3,128
-------
MASSACHUSETTS--3.9 %
Massachusetts Municipal Wholesale Electric
Company Power Supply Systems Revenue Bonds
Series 1992E / (AMBAC Insurance) (Aaa AAA)
5.50%, 07/01/00 2,000 2,070
-------
MICHIGAN--2.0 %
Michigan State Hospital Finance Authority Revenue
Bonds (McLaren Obligated Group) / (Escrowed to
Maturity with Government Securities) (Aaa -)
7.00%, 09/15/00 1,000 1,095
-------
MINNESOTA--8.3 %
Minneapolis, Minnesota Community Development
Agency Tax Increment Revenue Bonds / (MBIA
Insurance) (Aaa AAA)
7.00%, 09/01/00 1,000 1,079
</TABLE>
23
<PAGE> 30
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Minnesota State Housing Finance Agency Rental
Housing Revenue Bonds Series D / (MBIA
Insurance) (Aaa AAA)
4.80%, 08/01/01 $2,230 $ 2,257
St. Paul, Minnesota Sewer Revenue Bonds Series
1988A (Aa2 A)
8.00%, 12/01/98 1,050 1,108
-------
4,444
-------
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 2,053
-------
MISSOURI--1.0 %
Missouri State Environmental Improvement & Energy
Resources Authority Water Pollution Control
Revenue Bonds (State Revolving Fund Program)
Series 1992A (Aa1 -)
5.80%, 07/01/99 500 515
-------
NEW YORK--9.2 %
Municipal Assistance Corp. for the City of New
York Revenue Bonds Series L (Aa2 AA-)
5.50%, 07/01/03 2,000 2,104
New York City, New York General Obligation Bonds
Series L (Baa1 BBB+)
5.10%, 08/01/02 800 813
New York State Dormitory Authority Lease Revenue
Refunding Bonds (State University Dormitory
Facilities) Series 1995A / (AMBAC Insurance)
(Aaa AAA)
5.10%, 07/01/01 2,000 2,053
-------
4,970
-------
OHIO--7.1 %
Ohio State Public Facilities Commission Higher
Education Capital Facilities Revenue Bonds
Series II-A / (MBIA Insurance) (Aaa AAA)
4.38%, 11/01/00 1,750 1,761
Ohio State Public Facilities Commission Higher
Education Capital Facilities Revenue Bonds
Series II-B / (FSA Insurance) (Aaa AAA)
5.00%, 11/01/01 2,000 2,057
-------
3,818
-------
</TABLE>
24
<PAGE> 31
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
PENNSYLVANIA--2.3 %
Pennsylvania State Industrial Development
Authority Revenue Bonds / (AMBAC Insurance)
(Aaa AAA)
4.50%, 07/01/98 $1,230 $ 1,237
-------
SOUTH CAROLINA--6.4 %
Charleston, South Carolina Public Facilities
Certificates of Participation (Public
Improvement Project) Series 1993 / (AMBAC
Insurance) (Aaa AAA)
4.30%, 09/01/00 1,085 1,088
Greenville, South Carolina Hospital Facilities
Revenue Refunding Bonds Series 1993C (- AA-)
5.00%, 05/01/00 1,090 1,104
South Carolina State Public Service Authority
Power Electric Revenue Refunding Bonds (Santee
Cooper) Series 1991A (Aa2 AA-)
5.60%, 07/01/00 1,200 1,241
-------
3,433
-------
TENNESSEE--5.0 %
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 2,703
-------
TEXAS--1.9 %
Houston, Texas General Obligation Revenue Bonds
Series 1995A (Aa3 AA-)
5.30%, 03/01/01 1,000 1,021
-------
WASHINGTON--7.4 %
Port of Seattle, Washington Revenue Bonds Series
B / (FGIC Insurance) (Aaa AAA)
5.50%, 09/01/02 2,775 2,882
Washington State General Obligation Refunding
Bonds Series 1991 R-92 B (Aa1 AA+)
6.30%, 09/01/02 1,000 1,078
-------
3,960
-------
</TABLE>
25
<PAGE> 32
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
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 $ 1,016
-------
TOTAL MUNICIPAL BONDS
(Cost $52,256) 52,783
-------
VARIABLE RATE OBLIGATIONS--1.5%(B)
CALIFORNIA--1.5 %
California Pollution Control Financing Authority
Solid Waste Disposal Revenue Bonds (Shell
Martinez) Series 96A (Shell Corp. Guaranty)
(Aa1 AAA)
3.40%, 09/01/97 800 800
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $800) 800
-------
SHORT-TERM INVESTMENTS--0.2%(C)
Provident Institutional Funds--MuniFund Portfolio
2.99%, 09/07/97 100 100
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $100) 100
-------
TOTAL INVESTMENTS--100%,
(Cost $53,156) $53,683
=======
</TABLE>
See accompanying Notes to Schedule of Investments.
26
<PAGE> 33
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--99.1%(A)
ALASKA--9.6 %
Kodiak Island Borough, Alaska General Obligation
Bonds Series 1994A / (AMBAC Insurance) (Aaa
AAA)
5.40%, 02/15/10 $2,500 $ 2,506
Valdez, Alaska Marine Terminal Revenue Bonds (BP
Pipeline Project) Series 1993B (Aa2 AA)
5.50%, 10/01/28 2,000 1,943
-------
4,449
-------
ARIZONA--4.9 %
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 2,248
-------
CALIFORNIA--6.3 %
California State Public Works Board Lease Revenue
Refunding Bonds (Various California State
University Projects) / (AMBAC Insurance) (Aaa
AAA)
5.38%, 10/01/17 800 791
Orange County, California Community Facilities
District Special Tax Revenue Bonds (Number
87-4) Series A / (MBIA Insurance) (Aaa AAA)
5.25%, 08/15/19 865 841
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 1,264
-------
2,896
-------
FLORIDA--2.8 %
Hillsborough County, Florida Aviation Revenue
Bonds (Tampa International Airport) Series
B / (FGIC Insurance) (Aaa AAA)
5.88%, 10/01/23 1,250 1,295
-------
ILLINOIS--2.5 %
Illinois State Toll Highway Authority Priority
Revenue Bonds Series 1992A (A1 A+)
6.38%, 01/01/15 1,100 1,166
-------
IOWA--2.5 %
Ames, Iowa Hospital Revenue Bonds (Mary Greeley
Medical Center Project) Series 1993 / (AMBAC
Insurance) (Aaa AAA)
5.70%, 08/15/12 500 515
</TABLE>
27
<PAGE> 34
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Cedar Rapids, Iowa Hospital Facilities Revenue
Bonds (St. Luke's Methodist Project) Series
1993 / (FGIC Insurance) (Aaa AAA)
6.13%, 08/15/13 $ 600 $ 629
-------
1,144
-------
KENTUCKY--2.1 %
Jefferson County, Kentucky Health Facilities
Revenue Bonds (University Medical Center
Project) / (MBIA Insurance) (Aaa AAA)
5.25%, 07/01/22 1,000 965
-------
MARYLAND--0.9 %
Maryland State Community Development
Administration Department of Housing &
Community Development Series A (Aa2 -)
5.88%, 07/01/16 400 413
-------
MASSACHUSETTS--5.9 %
Massachusetts State Health & Education Facilities
Authority Revenue Bonds (Berklee College of
Music) Series E / (MBIA Insurance) (- AAA)
5.10%, 10/01/27 2,000 1,888
Massachusetts State Housing Finance Agency
Multi-Family Residential Housing Revenue Bonds
Series 1989A (A A+)
7.80%, 08/01/22 800 843
-------
2,731
-------
MICHIGAN--10.3 %
Detroit, Michigan Water Supply System Senior Lien
Revenue Bonds Series 1997A / (MBIA Insurance)
(Aaa AAA)
5.00%, 07/01/27 3,000 2,782
Eastern Michigan University Board of Regents
Revenue Bonds / (FGIC Insurance) (Aaa AAA)
5.50%, 06/01/17 2,000 2,013
-------
4,795
-------
MISSISSIPPI--4.9 %
Mississippi Hospital Equipment & Facilities
Authority Revenue Bonds (Mississippi Baptist
Medical Center) / (MBIA Insurance) (Aaa AAA)
6.00%, 05/01/13 2,150 2,274
-------
</TABLE>
28
<PAGE> 35
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
NEW YORK--4.2 %
New York State General Obligation Bonds Series
1996A (A2 A)
5.30%, 07/15/15 $2,000 $ 1,963
-------
NORTH CAROLINA--4.2 %
North Carolina Medical Care Community Health Care
Facilities Revenue Bonds (Care Medical Project)
(Aa3 AA)
5.25%, 05/01/21 2,000 1,930
-------
PENNSYLVANIA--8.7 %
Pennsylvania Higher Education Facilities
Authority Revenue Bonds (University of
Pennsylvania Health Services) Series 1996A (Aa
AA)
5.75%, 01/01/17 2,000 2,048
Philadelphia, Pennsylvania Hospital & Higher
Education Facilities Authority Revenue
Refunding Bonds (Childrens Hospital) (Aa3 AA)
5.25%, 02/15/08 700 712
Pittsburgh, Pennsylvania Water & Sewer Authority
Revenue Bonds Series B / (FSA Insurance) (Aaa
AAA)
5.75%, 09/01/25 1,250 1,270
-------
4,030
-------
RHODE ISLAND--2.3 %
Rhode Island Housing & Mortgage Finance Corp.
Homeownership Opportunity Bonds Series 10A (Aa2
AA+)
6.50%, 10/01/22 1,000 1,053
-------
TEXAS--12.1 %
Austin, Texas Utilities System Revenue
Bonds / (FSA Insurance) (Aaa AAA)
5.13%, 11/15/16 3,000 2,862
Conroe, Texas Independent School District General
Obligation Bonds / (Permanent School Fund
Guaranty) (Aaa AAA)
5.25%, 02/15/21 1,000 971
Texas State Public Financing Authority General
Obligation Bonds Series 1994B (Aa2 AA)
5.75%, 10/01/14 1,025 1,057
University of Texas Revenue Refunding Bonds
Series B (Aa1 -)
6.75%, 08/15/13 680 740
-------
5,630
-------
</TABLE>
29
<PAGE> 36
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VIRGINIA--4.4 %
Virginia State Public Building Authority Revenue
Bonds Public Facilities Series A (Aa2 AA)
5.50%, 08/01/16 $2,000 $ 2,028
-------
WASHINGTON--8.3 %
King County, Washington Lease Revenue Bonds (King
Street Center Project) / (MBIA Insurance) (Aaa
AAA)
5.13%, 06/01/17 1,000 954
King County, Washington School District General
Obligation Bonds No. 415 Series A (A1 AA-)
5.55%, 12/01/11 500 516
Seattle, Washington Municipal Light & Power
Revenue Refunding Bonds Series 1993 (Aa AA)
5.40%, 05/01/08 2,300 2,360
-------
3,830
-------
WISCONSIN--2.2 %
Wisconsin State Health & Education Facilities
Revenue Bonds (Medical College of Wisconsin
Project) / (MBIA Insurance) (Aaa AAA)
5.50%, 03/01/17 1,000 998
-------
TOTAL MUNICIPAL BONDS
(Cost $44,263) 45,838
-------
VARIABLE RATE OBLIGATIONS--0.9%(B)
CALIFORNIA--0.9 %
Irvine Ranch, California Water District
Consolidated District Numbers 140, 240, 105,
250 / (Bank of America LOC) (Aa2 AA-)
3.40%, 09/01/97 400 400
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $400) 400
-------
SHORT-TERM INVESTMENTS--0.0%(C)
Provident Institutional Funds--MuniFund Portfolio
2.99%, 09/07/97 16 16
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $16) 16
-------
TOTAL INVESTMENTS--100%,
(Cost $44,679) $46,254
=======
</TABLE>
30
<PAGE> 37
- ------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Ratings Group which were in effect on report date.
(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 the report date. Dates shown represent the latter
of the demand date or next interest rate change date, which is considered
the maturity date for financial reporting purposes. For variable rate
securities without demand features and which mature in less than one year,
the next interest reset date is shown.
(c) Interest rates represent the yield on the report date.
<TABLE>
<CAPTION>
Abbreviations
- ---------------------------------------------------------------
<S> <C>
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
</TABLE>
See accompanying Notes to Financial Statements.
31
<PAGE> 38
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $53,156 and
$44,679, respectively) $ 53,683 $46,254
Interest receivable 765 553
Receivable for Fund shares sold 10 214
Deferred organization costs 16 --
Prepaid expenses 13 13
------- -------
Total assets 54,487 47,034
------- -------
LIABILITIES
Payable for:
Dividends 35 37
Fund shares redeemed 4 186
Other 51 44
------- -------
Total liabilities 90 267
------- -------
Net assets applicable to outstanding shares $ 54,397 $46,767
======= =======
NET ASSETS CONSIST OF:
Paid-in-capital $ 54,373 $45,160
Undistributed net investment income 12 15
Accumulated net realized gain (loss) on
investments sold (515) 17
Net unrealized appreciation on investments 527 1,575
------- -------
$ 54,397 $46,767
======= =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 5,356 4,442
Net asset value, offering and redemption
price per share $10.16 $10.53
</TABLE>
See accompanying Notes to Financial Statements.
32
<PAGE> 39
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1997
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
Interest income $2,429 $ 2,442
------ ------
Expenses:
Investment advisory and administration fee 218 179
Transfer agency and shareholder service
fees 133 109
Custodian fees 37 32
Registration fees 32 32
Professional fees 20 27
Shareholder reports 31 28
Trustees' fees 7 7
Amortization of deferred organization
costs 15 17
Other expenses 16 17
------ ------
509 448
Less expenses reduced (see Note 4) (249) (234)
------ ------
Total expenses incurred by Fund 260 214
------ ------
Net investment income 2,169 2,228
------ ------
Net realized gain on investments sold 22 407
Increase in net unrealized appreciation on
investments 586 1,281
------ ------
Net gain on investments 608 1,688
------ ------
Increase in net assets resulting from
operations $2,777 $ 3,916
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
33
<PAGE> 40
- ------------------------------------------------------------------------------
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,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,169 $ 2,146 $ 2,228 $ 2,193
Net realized gain on investments
sold 22 150 407 423
Increase (decrease) in net
unrealized gain on investments 586 (590) 1,281 (635)
-------- -------- -------- --------
Increase in net assets resulting
from operations 2,777 1,706 3,916 1,981
-------- -------- -------- --------
Dividends to shareholders from net
investment income (2,169) (2,147) (2,228) (2,193)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 15,680 19,101 14,726 18,452
Net asset value of shares issued in
reinvestment of dividends 1,698 1,701 1,547 1,569
Less payments for shares redeemed (17,721) (18,733) (14,866) (17,550)
-------- -------- -------- --------
Increase (decrease) in net assets
from capital share transactions (343) 2,069 1,407 2,471
-------- -------- -------- --------
Total increase in net assets 265 1,628 3,095 2,259
Net assets:
Beginning of period 54,132 52,504 43,672 41,413
-------- -------- -------- --------
End of period (including
undistributed net investment
income of $12, $12, $15 and $15,
respectively) $ 54,397 $ 54,132 $ 46,767 $ 43,672
======== ======== ======== ========
Number of Fund shares:
Sold 1,549 1,891 1,415 1,797
Reinvested 168 168 149 153
Redeemed (1,754) (1,854) (1,434) (1,714)
-------- -------- -------- --------
Net increase (decrease) in shares
outstanding (37) 205 130 236
Shares outstanding:
Beginning of period 5,393 5,188 4,312 4,076
-------- -------- -------- --------
End of period 5,356 5,393 4,442 4,312
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
34
<PAGE> 41
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Tax-Free Bond Fund
-----------------------------------------------------
Period
ended
Year ended August 31, August 31,
1997 1996 1995 1994 1993**
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.04 $ 10.12 $ 9.92 $ 10.15 $ 10.00
Income from investment operations
- ------------------------
Net investment income 0.41 0.41 0.40 0.37 0.13
Net realized and unrealized gain (loss)
on investments 0.12 (0.08) 0.20 (0.23) 0.15
------- ------- ------- ------- -------
Total from investment operations 0.53 0.33 0.60 0.14 0.28
Less distributions
- ------------
Dividends from net investment income (0.41) (0.41) (0.40) (0.37) (0.13)
Distributions from realized gain on
investments -- -- -- -- --
------- ------- ------- ------- -------
Total distributions (0.41) (0.41) (0.40) (0.37) (0.13)
------- ------- ------- ------- -------
Net asset value at end of period $ 10.16 $ 10.04 $ 10.12 $ 9.92 $ 10.15
======= ======= ======= ======= =======
Total return (not annualized) 5.40% 3.32% 6.23% 1.42% 2.83%
- --------
Ratios/Supplemental data
- ------------------
Net assets, end of period (000s) $54,397 $54,132 $52,504 $63,889 $ 54,450
Ratio of expenses to average net assets+ 0.49% 0.49% 0.49% 0.48% 0.45%*
Ratio of net investment income to
average net assets+ 4.08% 4.06% 4.06% 3.71% 3.63%*
Portfolio turnover rate 20% 44% 35% 19% 11%
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average
net assets 0.96% 0.90% 0.89% 0.91% 1.26%*
Ratio of net investment income 3.61% 3.65% 3.66% 3.28% 2.82%*
</TABLE>
* Annualized
** For the period April 21, 1993 (commencement of operations) to August 31,
1993.
See accompanying Notes to Financial Statements.
35
<PAGE> 42
- ------------------------------------------------------------------------------
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,
1997 1996 1995 1994 1993 1992**
------- ------- ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00
Income from investment
- -----------------
operations
--------
Net investment income 0.53 0.52 0.53 0.52 0.36 0.17
Net realized and unrealized
gain (loss) on investments 0.40 (0.03) 0.21 (0.56) 0.67 (0.08)
------- ------- ------- ------- ------- -------
Total from investment
operations 0.93 0.49 0.74 (0.04) 1.03 0.09
Less distributions
- ------------
Dividends from net investment
income (0.53) (0.52) (0.53) (0.52) (0.36) (0.17)
Distributions from realized
gain on investments -- -- -- (0.08) -- --
------- ------- ------- ------- ------- -------
Total distributions (0.53) (0.52) (0.53) (0.60) (0.36) (0.17)
------- ------- ------- ------- ------- -------
Net asset value at end of
period $ 10.53 $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= ======= ======= =======
Total return (not annualized) 9.36% 4.87% 7.76% (0.42)% 10.56% 0.92%
- --------
Ratios/Supplemental data
- ------------------
Net assets, end of period
(000s) $46,767 $43,672 $41,413 $43,975 $ 50,413 $ 28,034
Ratio of expenses to average
net assets+ 0.49% 0.49% 0.54% 0.51% 0.45%* 0.45%*
Ratio of net investment income
to average net assets+ 5.09% 5.06% 5.40% 5.05% 5.30%* 5.61%*
Portfolio turnover rate 61% 50% 70% 62% 91% 54%
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average
net assets 1.02% 0.94% 0.93% 0.99% 1.18%* 1.53%*
Ratio of net investment
income 4.56% 4.61% 5.01% 4.57% 4.57%* 4.53%*
</TABLE>
* Annualized
** For the period September 11, 1992 (commencement of operations) to December
31, 1992.
See accompanying Notes to Financial Statements.
36
<PAGE> 43
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1997
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.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost, which approximates market value.
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Realized
gains and losses from security transactions are determined on an identified cost
basis. Interest income is accrued on a daily basis and includes amortization of
premium on investments. For callable bonds purchased at a premium, the excess of
the purchase price over the call value is amortized against interest income
through the call date. If the call provision is not exercised by the issuer, any
remaining premium is amortized through the final maturity date.
37
<PAGE> 44
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Dividends to shareholders -- Each Fund declares a daily dividend, from net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds and their initial registration with the Securities and
Exchange Commission are amortized on a straight-line basis over a five-year
period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
All distributions paid by Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund during the year ended August 31, 1997
qualify as exempt interest dividends for federal tax purposes.
At August 31, 1997, (for financial reporting and federal income tax purposes),
net unrealized gain for the Schwab Short/Intermediate Tax-Free Bond Fund
aggregated $527,000 of which $592,000 related to appreciated securities and
$65,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Tax-Free Bond Fund aggregated $1,575,000, of which $1,678,000
related to appreciated securities and $103,000 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. The Investment
38
<PAGE> 45
- ------------------------------------------------------------------------------
Manager has reduced a portion of its fee for the year ended August 31, 1997 (see
Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
Schwab has reduced a portion of its fees for the year ended August 31, 1997 (see
Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1997, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Funds incurred fees aggregating $14,000
related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit each Fund's ratio of operating expenses to average net assets for each
Fund. During the year ended August 31, 1997, the total of such fees reduced by
the Investment Manager and Schwab were $137,000 and $112,000 for the Schwab
Short/Intermediate Tax-Free Bond Fund, respectively, and $141,000 and $93,000
for the Schwab Long-Term Tax-Free Bond Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1997, 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 $ 12,063 $ 27,246
Proceeds of sales and
maturities $ 11,814 $ 25,899
</TABLE>
39
<PAGE> 46
- ------------------------------------------------------------------------------
To the Trustees
and Shareholders of the Schwab Short/Intermediate Tax-Free Bond Fund and
the Schwab Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets 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, 1997, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 30, 1997
40
<PAGE> 47
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab Asset Director(R) - High Growth Fund
Schwab Asset Director - Balanced Growth Fund
Schwab Asset Director - Conservative Growth Fund
Schwab OneSource Portfolios - Growth Allocation
Schwab OneSource Portfolios - Balanced Allocation
SCHWAB STOCK FUNDS
Schwab 1000 Fund(R)
Schwab S&P 500 Fund
Schwab Analytics Fund(R)
Schwab Small-Cap Index Fund(R)
Schwab OneSource Portfolios - Small Company
Schwab International Index Fund(R)
Schwab OneSource Portfolios - International
SCHWAB BOND FUNDS
Schwab Government Bond Funds - Long-Term and Short/Intermediate
Schwab Tax-Free Bond Funds - Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds - Long-Term and Short/Intermediate
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds* that seek high current income with
safety and liquidity. Choose from taxable or tax-advantaged alternatives. Many
can be linked to your Schwab account to "sweep" cash balances automatically when
you're between investments. Or, for your larger cash reserves, choose one of our
Value Advantage Investments(R).
Please call 1-800-435-4000 for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including charges and
expenses. Please read it carefully before investing.
This report must be preceded or accompanied by a current prospectus.
*Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
<PAGE> 48
SCHWABFUNDS BULK RATE
FAMILY U.S. POSTAGE
101 Montgomery Street PAID
San Francisco, California 94104 CHARLES SCHWAB
INVESTMENT ADVISOR
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(C)1997 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE.
